256 MB of ram for a system with a 3000+ and a "real" video card seems pretty low. You'd probably get by a lot better if you dropped the SATA hard drive, and if the DVD-ROM is a full-size drive, drop that as well, and use laptop drives. I have a SATA hard drive in my desktop and it runs very hot, and all that heat is coming directly from the power supplied to it. Not to mention, drives are a power issue because they use a lot of power when they first spin up, which can cause the power supply to freak out if it's close to being overloaded normally. Probably also wouldn't hurt to use a lesser video card.
Basically, I would say make some sacrifices to minimize power use, or pony up and buy the bigger power supply; while it's possible that your system as listed could run on an M2-ATX, I think it would be really pushing the limits and that is BOUND to lead to power problems, and having power problems sucks, like getting freezing or random restarts when the power use goes too high for a short time. Also, you say that the most heavy use will be watching XVID, and that that isn't going to strain the CPU... if that's the case, you could just as easily use a slower processor, or underclock it.