if your going to reinstall, use as much filespace as you can. i use 2gb which is the max, but if you think about it, regular linux distros use 5-10gb for a fresh install. if you can, you should upgrade your hard drive.
as for the internet connection, i don't really understand you. for the xbox, as long as a cat-5 cable is plugged into the back, the xbox will connect to that line. so if internet is a problem, you need to tweak your router, not xdsl.