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I haven't had any problems with XP on the 701 (aside from hard drive space) but it does need more RAM. We put 2G in at work and it flies.
However if you don't upgrade the RAM you have to be a bit considerate of its limited capabilities. Just don't bother with AVG or windows defender. You don't need either of them if you're not routinely visiting shady sites or pirating software and the Eee (and any computer really) runs way better without them.
It's also funny that you choose XP because of the height of windows. Linux makes it dead simple to deal with oversized windows (ALT-Drag) while Windows is a pain in the ass (hacks like virtual res of 800x600 which don't always work like you say). Overall the 701 is way better suited to Linux. Leave XP for the more powerful mini notebooks..
I beg to differ regarding AV/anti-spyware. I sincerely believe that it's important to run these when on Windows, especially when connected to the net. A user can easily get infected SD cards or even mp3 players from friends -- let alone the internet spyware.
As for the height of the windows. While Linux might have a shortcut about this, it also has more apps that require the shortcut. On Windows, these [popular] apps that would require it are fewer. So it's a trade off. Edited 2008-09-17 01:17 UTC
I recommend ESET Smart Security (it's NOD32 with internet security tools) for older machines... and for modern ones too. It's very lightweight and still can deal with everything efficiently. In my experience it's usually using 30-40MB of RAM. It's not free like AVG though.
Using two different antimalware solutions is a bit too much for any computer IMHO.
Regarding ALT-drag, Although Windows doesn't support it out of the box, you can choose one of these small utilities on Windows:
The latter also allows resizing with ALT + right/middle-mouse-button. Both GPL.