You're doing it all wrong...
First, there is no root password in Ubuntu. This is done on purpose to keep you from completely hosing your install and for security. The only way to perform root-privileged actions is to use sudo as a "su-do-er". If you Log in with the user name and password you picked during installation you are a sudoer.
Do not edit /etc/networks/interfaces - it is generated by LinuxMCE. Go to the web admin and switch your interfaces and watch what happens to all your changes.
The reason you have eth3 and not eth1 is because of the udev rules which assign such names to devices. Search the forums and you'll see how to fix that quite easily.
The reason everything else about your network setup is busted (even if you haven't noticed yet, it is) is that all the configuration files that depend on your network adapter name are now pointing to a non-existent device. This needs to be corrected. Either reinstall with the current hardware setup, or take some hints from this page as to what needs to be corrected: http://wiki.linuxmce.org/index.php/Single_to_Double_NIC
You can consider "eth0:0" to be your "wlan0" for most of that. Use your judgment - it's not a perfect process and hasn't been updated in a while.
0810 is pretty stable in my experience, and the install procedure isn't too hard. I would suggest it over 0710, since there are quite a few new features, tons of fixes, and much better hardware support. Everything you need to know is well documented on the alpha wiki page. http://wiki.linuxmce.org/index.php/LinuxMCE-0810_alpha2
Of course, 0710 is still the "official" release, and it's a bit easier to install with the DVD, but it's getting a bit old so hardware support is lacking.
I'm not sure what you mean by "LMCEs wiki" being different from "wiki's LinuxMCE entry".
Yes, 512MB is not really enough. 1-2GB is more realistic.