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This is a shared memory job, so it will use your system memory as and when it needs it. Depends on what you're doing, but from what you describe, you ain't going to push it to its limits.
Personally I'd go for the x300 with its dedicated 128MB of memory...then it won't touch the system memory at all.
1GB of memory on XP is a def. YES! XP will love it and combined with that dual core you'll have a nice system.
If the 2GB is going cheap then you might as well, but 1GB is fine.