The Windows 7 operating system will have its share of problems when Microsoft releases it to the market. Don't touch Windows 7 for about a year so they can work out all the bugs.
Yes, you can do as you stated. Backup all the data that is important to you, reformat your hard drive and then you can install Windows XP. Out of curiousity, why do you want the Windows XP operating system over Windows Vista?
Then YES, do it! Even with 1GB, it's slow, regardless of the version. It is as simple as reformatting and installing XP, just make the hardware you have has XP drivers available.