You'll have a number of choices, just like regular Ubuntu. That drive is pretty small, but it can still be chopped into a couple partitions.
Xubuntu can use any software Ubuntu can; it accesses the same repositories. You can install OpenOffice easily. Pidgin is included and can handle MSN, and aMSN is another choice available in the repos.
I don't know; what's your card?
Same as above, but more likely.
Pretty good. Xubuntu is not a very lightweight distro, but you can always lighten it up after installation if it's too heavy. If it actually can't boot (unlikely; that should be enough RAM), you can try the command-line installer on the alternate CD.
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