Windows XP is fine, it just goes batty at times ... upgrades being one of the risk times. With the cost of disk drives these days, I usually buy 80 GB drives for $29 on sale, the best way is to have a few spares.
I run XP in 384 MB and on a 500 mhz PIII just for the pain, it’s quite slow. But 512 MB should be sufficient for minimum use. Nowadays I recommend a GB or more.
If you get XP make sure you get the OEM version without the craplettes — It makes it a bit more bearable on slow systems, and quite snappy on a better machine.
Good luck.
You can uninstall the craplets, can't you? I'm sure I won't need most of them.