IMHO...With those specs, I would absolutely run Vista. And Vista includes a Microsoft decoder.
As to video adapter, I do not have experience with ATI, but I have heard some problems with the drivers in these forums. I would search for posts in these forums specifically with this model #. But I do know that Nvidia 8500 (~$50) cards and greater work really well under Vista, including HD video acceleration.
Why are you set on MCE2005?
1: Dimension 9200 - Vista Ult, 2.4GHz Q6600 Core2Quad, 4GB RAM, 160GB, 750GB, 500GB USB, Nvidia 8300GS, PVR-150, HDTV Wonder, Vbox 3560, X360, DMA2100
2: HP m376n - MCE 2005, 2.6 P4 w/HT, 1GB RAM, 250GB, 400GB USB HD, Nvidia 6200, Emuzed MAUI, X360