I've spent the past few days tinkering with various options in nLite. I was able to get the Win XP Home install (using the CD supplied from Dell as a starting point to create the custom ISO) down to about 650MB of space used. The ISO itself was just 201MB.
I'm still experimenting, but the only problem I had was getting the Webcam to work (the driver would throw an error during installation). I just talked to another engineer about this and I think I know what it is...
I had unchecked Windows Image Acquisition
during the nLite process and I recall for a fact that webcams and scanners need that. Will try it again with WIA
included. If it works, then I can say that I've got XP down to under 700MB of space used. My goal is to have Win XP Home SP-3, all the latest Windows Updates, IE7, FireFox, and AVG Free or Norton Internet Security 2009 all taking up 1GB of space or less
I should add that right out of the box, I only had about 700MB free on the 8GB SSD