I don't dispute that Linux has the ability to be pared down much farther than Windows. Though I'm sure you have a typo there... 2MB (I presume you mean disk space) is not enough to hold any Linux install that can be reasonably used by a typical home user. I would believe 20MB, as I did an embedded Linux controller for a product a few years ago that ran about 30MB and we had a few extra functions.
Anyway, they're not going to kill off XP in practice -- they just want to make it harder to choose. They'll keep trying, but Vista is such a resource pig that they will lose an increasing share of the low-end market if they don't address it with something people want.
I have a fully functional Puppy Linux install on a 256MB USB key. I run it occasionally on my EEEpc (booting from USB). It has a word processor, spreadsheet program, even a few games. Even wireless works. Of course, you need additional space for storing stuff, but for web surfing and email it works fine. But you’re right...I wouldn’t want to use it as my primary OS.
Sorry...I though everyone was talking about linux not fitting on anything smaller that 2GB, so my post doesn’t make much sense..
The Linux operating system itself can go much lower than the usual desktop applications that run on it.. As stated at IBM's Embedded Linux page:
a Linux system can actually be adapted to work with as little as 256 KB ROM and 512 KB RAM.
If they didn't mind running telnet for their web browser and ed for their word processor (one at a time!), they might need only another 128 Kbytes of RAM. But this is for serious (and insanely impoverished) geeks. Beware that none of the usual command line shells, not even sash - Stand-alone shell will go quite that low. When I have to work down here, I write my own shells using a page or two of C code to fork and exec simple commands, one at a time, as read from the input.
Linux can also stretch the other way. I've run on it systems with 2048 CPUs and 2 terabytes of main memory. This wasn't a cluster; this was a single system image (SSI) multi-processor system.