I've used nlite before, quite a while ago, but now i need a new cd, so im fairly familiar with the process. Onto the problem.

1. When i copied over the install files from the OE WinXP cd, i saved them in a folder with some other stuff, and when that happened, it DELETED everything in that folder besides one file (which was an active torrent). Is this normal for the new versions? I just lost quite a bit of stuff, which isn't present in the recycle bin, it's just gone. What happened?

2. I went through the process of eliminating all the files and services that i wont use, got to the burn/create iso screen, made the ISO, and it's 834mb...what the hell? My last nlite install was 300mb.

If these things are normal for noobs/idiots, then just scrap this post and i'll probably eventually figure it out.

Thanks for the help though if anyone can throw some advice my way.

create C:\xpcd
use copy & paste to copy all content from xp cd (a 'clean' one -ie, not pre-nlited) to the folder
run nlite

Unless you corrected this already, if your torrent file is in your working directory, then it's also on the ISO. I don't know if this could be the cause of your oversized ISO. Maybe you added too much drivers or addons.
As suggested by Bledd, creating a new and empty directory is a better idea.

The torrent file being added to the ISO makes sense, thanks for that.

Any info on why everything else in the designated directory was deleted? Obviously from now on i'll be making a new folder specifically for it.

no idea what could have happened, you could try a program like recuva to locate the deleted files