[kchan]

to your first question,
windows XP is running on 32bit thus you have maximum of 3.5GB that you may use, to make full use of your 4gb, id suggest going for a 64bit OS, in this case Windows 7 since im not a fan of Vista myself
you dont have to upgrade, but why not use 64bit? its pretty much better in terms of performance, but the downside is that some programs might not work as they were made for and under 32bit

for your C2D question, windows xp is capable of detecting your C2D and use it, no matter if its dual core or quad core