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As for the drivers, this is where I start to go nuts. I have found sources that claim that the 64 bit os can utilize 32 bit app and such, if those don't have or can't support 64. Supposedly there is a folder in the OS called 84 or something like that. I have no idea. I have found evidence supporting both claims. I am searching still.
XP64 would emulate the XP32 environment aka Windows on Windows. Some apps are ok with it. Some will run slow. It's best to check with the software vendor first. If you are going to play a lot of games, I would stick to XP32 over 64.
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In system 2, I have xp 32 for now for testing and fooling around, and it does not seem to be recognizing all of the mem. I do have 3 gigs total installed, and it reads 2.75 gigs in system props. Mem test show the sticks as OK.
Sounds like you have onboard video. Part of the ram would be reserved for that. It has nothing to do with it being on XP32.