I am in no way an expert but have been trolling the forums for a couple of months, and have read all of the FAQ's so I think I can answer some of these questions before you get flooded with posts that just tell you to search and read the FAQ's
XP is the dominant os due to its stability and software options available and that almost everybody has a copy of it, I wouldnt even dream of running 98 or ME. You could use linux as its super stable but then you are going to be limited on the software you can use. Your standard XP install is going to be a bit bloated with a bunch of stuff you don't need, so I would go and turn off all the extra crap you dont need that way you can get a computer with so-so specs to still run ok. Check out this site
to see a list of services and what they do and if you can turn them off or not. I happen to use a version of XP pro called the "stripped to the bone edition" it is a ultra lightweight version that has just about everything you don't need turned off and all the extra crap that I would never use removed and its really really fast. I think the total amount of space that it uses in somthing like 400 megs total, freeing up the rest of my hard drive for other stuff like programs and mp3's. Also you are going to want to go to msconfig and turn off all the extra stuff that you wont need, I also dont think you will need any antivirus software running in the background.
here is a link to the forum topic that has a list of all the different carpc frontends that you can use.
List of front-ends/other useful apps
basicly I would install a bunch of them and check them out and see which one works for you.
and as for the power supply question, NO you can't just wire your power supply. for that you need to check the the power supply faq here.
FAQ: Power Supplies Explained (Part 1)
you really do need to read all the FAQ's and search the forums, the answers are there you just need to find them.