As far as I can tell, the video and concept is genuine. I wouldn’t have thought that the iPod Touch was powerful enough to run Windows XP personally.
I don’t think that any remote desktop type tool or application such as VNC is being used, as you can’t see the installation screen nor the windows startup screen over VNC. This is because the VNC server (as with other remote control applications) are only loaded once the OS has loaded.
Video
The author claims to have written drivers and hacked a bootloader to get the installation working. All that remains now is for the author to share the step-by-step instructions on how it was done! If it is a spoof, the only way that I can think of is that animations and screenshots were created to emulate what would happen if Windows had been installed on an iPod touch. Just think of what can be done with photoshop.