I would go with XP or Linux over Vista.

If you're sure you want to go Vista then get Home Premium - Home Basic is rubbish (many bits missing).

I would say go with a pentium dual core e2160 (about £40 at the moment) and over clock it. on a p35 board you can over clock these babies to 3 GHz  awesome for the price. If you're not that techy, see this article to see how easy this is http://www.tomshardware.com/2007/09/12/pentium_dual_core/

Put all the spare cash into RAM and more RAM.

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