I have one of those laptops. Originally they came with Win98 but this one had been upgraded to w2k. Amazingly, the battery still works. At the time of acquisition, the update website still worked, so the E500 was fully updated.
To access the internet you need a card that plugs into a slot on the right-hand side. There's just one USB port, at the back. Although it works for USB sticks, I normally use a mouse there, because the touchpad is horrible.
This laptop only runs at about 300MHz, and takes a long time to boot up. It's very slow. Although as I say w2k works fine, the slowness means that Win98 would probably give a better experience.
You said yours is 800Mhz? I guess w2k would work much faster than it does for me. IMO I wouldn't try XP - 128MB isn't really enough for usability.