Assuming you can install XP on that rig at all, it will not work well. Trying to run iTunes on it will make you sad.
As @jerv says it’s possible you can replace memory modules to boost the RAM. It’s worth trying if you have the parts or can get them easily. More RAM is always a good thing to have.
I recommend you install something like Damn Small Linux to the machine. Ubuntu or Xubuntu are likely too resource-heavy to run well. DSL has a small footprint and can run any of several torrent clients. As the website states, DSL can run completely from RAM within 128MB, so the memory will not be an issue. Best of all, DSL runs from a “live” CD or USB image so you can try it without installing.
The only problem is, it won’t run iTunes. No matter what you do, it’s unlikely that this particular machine will ever run iTunes. Your commment about needing “codecs to use my ipod as a wifi adapter” does not make sense. You need device drivers to use the ipod that way, not codecs (codecs are only about coding/decoding file streams.) DSL might have the drivers built in- try plugging in the ipod and see what happens.
Anyway, if the machine is just for torrenting, you won’t want to use your ipod that way anyhow- it would be a drag to have to leave your ipod behind while you are torrenting. Get a dedicated wireless interface- they are easy and cheap to get. These days most USB wireless adapters will work with Linux. If it doesn’t have USB, you can get a PC Card wireless device at any store that carries used computer parts (I don’t think they make these any more- it doesn’t seem like newer laptops have PC Card slots.) If you go this route, try to get a Cisco brand card. If you haven’t got any stores of this type near you, or if you need more help, feel free to PM me and I’ll see what I can do for you.
Or, if you are really adventurous, tear out the mobo and replace it with a BeagleBoard…