MicroXP is really stripped, but isn't incompatible with video cards.
I cannot remember if the ArcadeVGA is a derivative of an ATI 7000. As I have MicroXP and that same card in one of my PCs I use for my Training Lab. MicroXP can be installed with or without drivers at install.
A good suggestion is to go into Device Manager and highlight the primary video card, and select properties. In the driver details tab click the update driver and point it to the drivers disc of the ArcadeVGA.
Reboot and it should be there in Display Settings under properties. Also check if your mainboard needs anything selected in BIOS. If it is a PCI or AGP card - I do not see any reason why it should not work.
before you do the above, please make sure you go into registry and clean out any reference of the previous ARCADE VGA drivers. Whatever you do, do not disable the default VGA driver in XP..... No that would be a real bad idea.

Let us know how you get on.