So I actually found a AGP video card, an old ATI Rage IIc that did support hardware overlays for Xserver. Problem was it had so little ram, I couldn't even get 320x240 output from the tv card. I tried a 640x480 Xserver resolution and 320x240 in tvime and mplayer but still no go. I had to go back to XP.
This time I remembered at least where all the drivers were so it only took about an hour to get back to being able to view the commodore 64 on the monitor. I tried to use partition magic to image the drive but with only 512mb of ram that proved challenging to say the least. I ended up using the builtin XP backup system and set a weekly incremental backup to my nas (had to drop down to SMB1 thou).
Back to the 1541 adapter I decided it would be best to drop down to pure DOS and not fuck with windows at all this time. I installed freedos on a 2nd 40gb hard drive and setup grub2win to be able to boot into it from the windows boot menu. Purrrrfect! I even went ahead and got TCP/IP networking up so I can download programs directly into dos and browse the web somewhat. Sooner or later I will get the sound working too.
Using the star commander dos program I am able to read and write disk images from dos with the original 1541 5 1/4in floppy drive. Mission accomplished! I even grabbed a copy of Cyber Mage and played it for a bit albeit without sound for now.
On another note, I had a heck of a time finding working links to ancient dos programs and will host them here or on the ftp server soon. Specifically the MS Client files I needed to get the ethernet working took me to 10-15 different sites before I found good links.