Hi Mate,
There is no doubt that windows 7 will be harder on the hardware than windows XP. The rig doesn't sound so outdated that spending a small amount on hardware wont give acceptable performance for internet and office use.
I would look at getting a second hand cheap gpu and more memory to speed things up a bit and help give a better experience; I would spend say £50(ish), on say 2gb of 2700/3200 DDR (£20-25) and the rest on a dedicated gpu.
The requirements to run aero on 7 are pretty low so you dont need to go mad on the graphics card (assuming your parents aren’t gamers). Something as old as an agp 9500 pro or an Nvidia 6 series card is perfectly capable of running aero.
Also remember that like vista, windows 7 is pretty big on disk so if their hard drive is any smaller than 60-80gb you will fill it up incredibly quickly.