How fast is the Pentium 4? I should imagine with 2gb of RAM it would work okay- you'd definately have to upgrade your current 512mb RAM, as Windows 7 would run very slow with that! I doubt the processor would hold it back too much, Windows 7 seems to run fine on netbooks which use gutless processors- it probably wouldn't run as quickly as XP though.
From a quick google search, I'm not sure that your pc has an AGP or PCI-E slot meaning you'd have to source a PCI graphics card, and I don't think they come very cheap (because they're rare), especially if you want one that supports Aero and the fancy Windows 7 visual effects. So far as I can tell your pc has Intel GMA900/915G graphics, which doesn't support aero etc- you would have to run Windows 7 with the ordinary visuals.
It's up to you really, while as I said it would probably run okay, personally I would keep XP. I would keep XP only because I wouldn't want to spend money on bringing a fairly old system up to date (especially if you want the flashy Aero effects) combined with the cost of Win7 itself. However if you're not fussed about the flashy bits, I'm sure Win7 would run fine with 2gb RAM and your current graphics and processor.