You'll want 2GB RAM minimum for Windows 7, so if you can upgrade that then possibly. Don't expect it to be super-fast though. As an aside, your HDD size indicates it came with the laptop new. If you're not doing so already, back up your documents!
Exactly. I've used several laptops like that (bought for $175 each) and XP provided a good experience. I can't imagine what loading a ram intensive program like win7 would do to it. You could buy more ram, but is that really worth it? Keep XP up to date on patches and spend the $$$ on a newer laptop.