I couldnt understand fully, but anyway, it seems you are trying to mount the '/' partition on the free space? You have to create a new partition, of type ext3. Then, specify the mount of point of this partition as ext3. Don't try to modify the free space, when you create a new partition, it will be created from the free space itself.
Also, its not necessary to make a seperate /home partition, it will be of benefit only if you use several linux distro's together.
And as for MBR, it means Master Boot Record, the first few bytes of the hard disk. Later on, when the installer has to install a boot loader, it will ask you where to install it. There, you should specify the MBR.
godsownman, well it really depends, for a very basic linux system, with just essential system tools and some development packages, it will probably take under 200MB. With X-Windows, you will need around 500MB, and if you install many applications, this can go to 1 GB. If you install KDE, Gnome etc, this can shoot to 2-3 GB.