Without more RAM and a bigger HDD I would not recommend Win7.
Even WinXP would be very sluggish and annoyingly slow.
What I would try is either Linux or FreeBSD, both are getting to be very mature and easy to use. I won't tell you to use gnome or kde cause I don't want to start THAT debate again here.
BTW it might help if we knew just what you tend to use this computer for? Gaming, web, email etc.
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