I've been playing G3 on my older system and my upgraded system, and for me, the main improvements came with upgrading my RAM from first 1 to 2 and then to 4 Gigs. I kept one of my old hard drives, (not SSD) and incidentally have G3 on it now- that doesn't seem to make a difference - my G3 runs smootly on it.
What also seemed to help is tweaking the .ini file like has been suggested above, and on the official forum; -getting those cache values just right, etc.
I've only patched to 1.6, and my G3 is running as smoothly as you would expect a continuous area gameworld to run. I do get the occasional momentary lag, sure, as has been said above, " on loading up a new area (stepping into a cave, torches, stepping over a vista) " , but nothing game-breaking at all.
I did used to get crashes after playing continuously for many hours, which I think was caused by the notorious memory leak problem. I found that exiting the game every few hours and re-entering helps for the memory-leak problem, though this was supposed to have been fixed by one of the patches.
I know theroretically your XP 32-bit system is only supposed to allocate limited amounts of RAM, but I find the issue of adding extra RAM a bit of a grey area (like believing or not believing in aliens - there's evidence for and against
); as I believe adding enough RAM to cover the 3.xxGbyte supposed limit to your system does free up more resources.
I dunno, it just can't really hurt to get an extra gig or two of RAM, it's become so relatively cheap these days, and I'm certainly very glad I upgraded to 4 G RAM.
(..and don't try and convince me otherwise, Gorath!
)