I'm not sure what sort of problems you are having with the reinstall,
but you can install ubuntu over any existing image. Choose manual
partitioning and it will let you do whatever want.

When you speak of ubuntu 8.1 my first thought is that there was no
January 2008 release of ubuntu. I'm thinking you might have gotten that
confused with 8.10, the October 2008 release.

8.10 will work but is quite dated, and will be unsupported in a few
months. So, if you can't download and burn an iso image, then I'd
encourage you to just get an ubuntu 10.04 CD, as there are LUGs handing
them out for free, and online stores sell them for a nominal price.

By default the ubuntu install is pretty darn secure. If I had any such
doubts about the low level character of the machine, I'd start fresh:
wipe the disk, flash the BIOS, then do a clean install of ubuntu 10.04.

Wireless connections can be insecure, particularly if you're sending
unencrypted passwords and other information across, so try to use only
strong encryption, and use https connections for your sensitive
information, if available. Always assume there is someone listening on
the wire, so make it hard for them to get anything.