You can definitely play dreamcast games on that setup. You probably won't need the extra stick of ram, but it's so cheap you might as well get it anyway.
I can run DC emu's 100% on my setup:
AMD Athlon 64 3000+
1.81 Ghz
2.0 GB RAM
Nvidia GeForce 7600 GS
If you upgraded the ram and the graphics card I don't think you'd have any problems playing any of the emulators out there. The only reason why games like Tekken run crappy in MAME is because they are all software dependent. They don't utilize your graphics card in much of any way. There are emulators out there that let you do that though, and they usually run much faster.
Personally, for a fighting games based cabinet I'm console all the way. Emulators aren't allowed in tournaments, and have input delay/bugs that interfere with the experience.