I was sick all long weekend + yesterday, and still not feeling 100%, so forgive my crankiness. A simple "I take exception to your assertion" would have sufficed
That said, XP's footprint on a clean install should be even smaller, though not dramatically so. The problem with XP is that it doesn't maintain itself nearly as well as 7 over time.
Honestly while 640 RAM isn't a lot, it should be more than sufficient for basic cloud usage, regardless of OS (except Vista). The real bottleneck on that system is going to be the CPU and HDD, and there isn't much that can be done about that.
I'd like to mention Xubuntu as another candidate. While it won't be as light as puppy or DSL, it's still a fairly light and full-featured distro.