1. You won't be able to build things from source on that machine. Consider using packages for installation, or a second system to build and export (via NFS) the data required.
You can but... too slow
3. For using your applications within the GUI, choose a good window manager, e. g. FVWM or XFCE 3 (not 4!), or IceWM or Blackbox or olvwm or something comparable. You need to try which one fits your needs. Maybe a tiling window manager would be even better -- but I can't recommend one, because their magic didn't open up to my ignorant mind yet. :-)
Actually everything should work fine with window managers you mentioned. The real problems are "modern" programs like firefox.
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