You should be able to run several VMs on this machine where "several" is bigger if you run appliance type vms where you install an OS with no GUI, and only 512k of RAM.
I did this about 5 years ago with a dual Core Intel and 4G of RAM. OpenSuse was the host OS because it is the easiest way to get an XEN server up and running. Then I set up an OpenSolaris VM and gave it most of the drives to manage using ZFS. And then an Ubuntu Desktop VM which used iSCSI to mount partitions from that OpenSolaris VM. I also had iSCSI partitions mounted on my Windows NT laptop and MacOsX 10.4 eMac. It all worked fine and I had a few other VMs that I put together to experiment with things like a firewall, and some appliance VMs.
- Install OpenSuSE Linux 12.1 but make sure to use LVM when you partition the HD
- Open up the Admin tool, YaST, and install virtualization. Reboot to load a XEN kernel.
- Using YaST, create a Logical Volume to be used as the virtual hard drive
- Go back to the Admin tool and use the Virtualization tool toe create a virtual machine. Point it at the new Logical Volume and the install .iso file.
Repeat steps 3 and 4 as needed. It pays to learn a bit about what can be done with LVM. It isn't quite as sophisticated as ZFS, but it is an essential part of a vm host server.
XEN is a more mature technology than KVM but the main reason to use XEN is that OpenSUSE makes it so easy to manage a small vm server with XEN. I would have suggested VirtualBox which I use everyday for software development and testing, but for some reason people don't use this for production servers. XEN is definitely a production tool and is the underlying technology of Amazon's EC2.