Linux – Can Linux function as its own ADSL modem

In general: you should be able to configure your DHCP server to assign permanent leases based on MAC address to certain clients. I have DD-WRT set up on my WRT54G router to do just this - so certain machines on my network will always have the same IP. Hunt around for the options in your router's firmware, see if they're there :-)

DHCP will also handle DNS and gateway configuration - so you should just be able to enter these values on your DHCP server (you didn't specify which of your routers is handling it) and clients will pick it up automatically. Indeed, that's the primary function of DHCP!

I presume that you have already worked with the ISP and are convinced that it isn't the DSL line or the equipment on their side. If not, I would start THERE. You will spend a bunch of time on the phone, but if the problem is ISP related it will take a while to get fixed, so you should start now. It will likely take a bunch of outages for them to admit the problem, because they close problems if an equipment reset fixes it.

I would obtain (buy or badger the ISP) a replacement DSL modem and see if that fixes the problem. If it does, you're done. If it doesn't, reset the DSL modem to factory settings and return it, because the problem is the WatchGuard.

If you need to replace the WatchGuard (and it isn't under warranty or service), I recommend Astaro. $1000 will get you a great firewall appliance for a small office.

You can also test the WatchGuard directly. If you can put up with some internet downtime, replace it with a standalone PC. Or if your firewall config is simple, get a free trial from Astaro. If the connection remains alive long enough (say three or four times the typical time to failure) then you know the WatchGuard was the problem.

Note #1: You don't need to do these serially, you can move forward on all three at the same time.

Note #2: You can build a great firewall on the cheap with a PC with multiple NICs and something like FS-Security or SmoothWall, but I wouldn't unless you are into rolling your own stuff or are horribly strapped for cash.