I'm new to LinuxMCE too. My system isn't running yet but with some help I'm on a good way
Formatting the HDD with NTFS won't help as far as I know. Kubuntu uses ext3.
I think I have read somewhere about creating the partitions manually with DVD installation but I can't remember exactly anymore.
Maybe you can try to install with the CD's. Download a kubuntu 7.10 Live CD and choose to create the partitions manually. About 80 GB ext3 to mount as root (/), about twice your RAM size for swap and the rest again with ext3 as your home (/home).
After installing kubuntu, install LinuxMCE with the two CD's.
Maybe this is the wrong way, but I think your problem is that the HDD is too big