First of all, why are you getting a netbook for watching movies and gaming? The tiny screen makes it horrible for movie watching and usually netbooks tend to perform poorly, which makes it poor choice for running newer games. I would really recommend you shell out another $50-100 for a 15.4 inch screen and vastly improved performance.
The lack of RAM pretty much rules out Vista, so it's between XP and Ubuntu.
If you're going to run old games on it i would recommend XP as most likely you can't run those games on Ubuntu. XP is also good as there's the widest selection of programs.
Ubuntu is also harder to learn, but once you get it, it's great. It's not that hard to use and you don't have to shell out $$$ for anti-virus software, and many programs like Firefox is included by default.
Linux does not have office 2007, but neither does Windows by default. In Linux there's a free alternative called OpenOffice included.