I'd say keep Windows XP, upgrade your CPU to a dual core model (or quad core if you have the money), get another GB of ram (or two because in XP it can actually recognize 4 GB unlike Vista, anything under Ultimate can only recognize 3.5BG), a new graphics card in the Nvidia 8 series or 9 series (or ATI's 4000 series because it's catching up with Nvidia)
Oh yeah and get a new Mother Board, I'd recommend one from Intel.
EDIT: Seeing the deals from PC companies I actually suggest getting a pre-built PC. For under 1k you can get a great PC online. But if you want XP you're going to have to fork up another 40 bucks.