The swap file (aka page file) can be moved to a different partition if you want; it just prevents you from getting a memory dump on BSoD. The other thing that takes up space (and that I don't think you can move) is a hibernate file, which is useful for a laptop. That will be the size of the amount of RAM you have.

As ProvRIGuy notes the need for temp space for updates and the like almost necessitates 4GB+ to have a system that works at all efficiently. If you do go smaller but have a second drive available for the %temp% and %tmp% locations (plus the swap file as noted above), and you routinely clean out the hotfix uninstalls you should be OK.

Of course, Office 2007 SP1 is rumored to be a ~1GB install (though I think they finally slimmed it down to ~500MB), and it was going to require something like 7GB of free space to perform the install. Not a huge issue today for an XP insall, but something to consider. No one knows what XP SP3 is really going to look like or what the free space requirements are going to be to apply it when it comes out later this year.