I'm not building expert, but I recently got into PC building and upgrading about a year back. If I were in your situation and had some spare cash I would probably sell the two 512MB RAM's. Then I would buy 4 x 1GB (running you around $180 for good RAM)
As far as Vista goes, I would go with Ultimate because it is a 64-Bit OS, but that is just something I like. There are still some obvious flaws in this. If you do get this, get the Media Center Remote as well (great add-on).
Your processor should be fine for now, though if you want to, you can plan ahead for the future.
You also mentioned that you didn't like your sound card or speakers. I don't know much about sound cards due to the fact that mine was onboard but it is amazing. I do recommend some Logitech Wireless Surround Sound Speakers.
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