Fair enough, I wouldn't be surprised if they used like 1-2GB RAM.
With Windows 7 32-bit typically taking close to 1GB of RAM by itself, it's possible bite into swap, although I would think that if you close all applications before playing, including background programs, you could be fine.

I'd personally just grab a RAM stick.  4GB DDR3 stick is like $20 now, so you could get a 2GB stick for less (assuming it's DDR3).  Saves you the hassle of reinstalling everything.

But if you must reinstall, basically boot from the XP CD as said previously.  You saying you get a BSoD in the text mode setup??!