Even with 1GB RAM, I still had Vista running slow. My friend is the same way, he's going to be changing that soon though. He doesn't game, so its not a really big deal for him. DDR2 RAM isn't all that expensive nowadays anyway, with DDR 3 out, which will eventually be the standard.
When I got my computer I only had a gig of ram and I ran vista great. I don't think I would go back to xp unless I absolutely had to. I've grown partial to my vista baby. I complained until I turned off UAC.
vista would eat up that 1gb ram easily, so there wouldnt be a great deal left for a game, especially the newer ones. you'll get a much better gaming experience on xp with that system. when dx10 becomes more mainstream and 2gb+ of ram is the standard then ill say ditch xp