PowerDVD 9 is a good option since you have an ATI card, it fully supports AVIVO HD decoding. I have to say my project was similar to yours, take real old parts and convert it to an HTPC. The HIS HD3650 is one of the best GPUs I've ever owned lol, it handles Blu-ray, has built in 5.1 Sound and comes with a DVI to HDMI adapter.
HIS - HD 3650 AGP 512MB 128-BIT GDD2 -http://www.newegg.com/Product/Product.aspx?Item=N82E16814161237
I was planning to buy the Sapphire version, I contacted the Sapphire support, but they said that their 3650 can't output sound but can outputup to 1080p with the adapter. Unfortunately the Sapphire doesn't come with any HDMI adapter, therefore I had to buy the HIS one. The HD3450 is also a nice choice for HD playback, its still has UVD so it'll decode fine.