I only started using XBMC on this box at Frodo 12.0.
I've never had problems with dropped frames or stutter on 720p video - almost everything I watch is 720p or higher from all kinds of sources...
Sure, very heavy skins aren't perfectly fluid and smooth in their animations (it takes a very beefy box to make the old Aeon Nox completely fluid) but I wouldn't call it laggy either.
Response time in the GUI is still a fraction of a second or after the animation completes, whichever is applicable.
Remember we're comparing it to the guys AppleTV2 which has a very weak single core CPU and 256MB of ram. If Aeon Nox ran at all on an ATV2 response time would be in the order of 10's of seconds for every click...(I've tried it on a 512MB fully overclocked Raspberry Pi and the old Aeon Nox is horrendously slow to the point of comedy)
Not saying the Mac is the best thing ever but for a 7 year old machine it still runs it very well especially now I have multi-threaded decoding turned on
It's still a massive improvement over an AppleTV 2 so I think the original poster will be pleased.
Having more than the original 1GB of ram may help with the really heavy skins as free memory is tight - I'll report any changes I notice when I upgrade the ram in a few days.