Should I buy an eee PC?
I’ve done something similar with the EEE 701, using handbrake to encode movies to an external hard drive, and playing them with VLC on the EEE. I have found that using h264 at DVD resolution is almost too taxing for the processor on the smaller EEE. I’d suggest either DIVX or downsizing the resolution. As far as Linux versus XP, it is much easier to install programs on XP than the EEE’s custom Linux distro.