You can get XP installed on it, but storage issues will be a real issue, you'll definitely need to be using an external drive.
Another issue to remember is that the EEEPC is not meant as a performance platform. It will get really bogged down handing RAW images, both because of the energy saving processor and the minimal RAM capacities.
So in short, can you do it? Yes. Would I bother doing it? probably not.
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I have the "1st generation" eePC. Comes with Linux (thus cheap) and I installed XP lite. The newer ones have a larger screen...i'm happy with mine,but the larger screen would be great. I have 1gb ram installed, 4gb harddrive and 8gb sdhc card and a 120 portable external.
A GREAT buy. One of the best purchases I made. They now "come installed" with XP,but for the same price get the Linux that has the larger drive and install XP lite yourself. The HD is solidstate..so it has pretty snappy performance. Sure, it's slow compared to most 'good' laptops, but heck, it weighs nothing, costs little and the battery lasts a long time.
I use it with PS and RAW files....and because of it's true portability I have found it a true asset. Seriously....it's 'shortcomings' for performance are far outweighedby it's true portability and light weight. I think you'll find that most users that have bought one are very happy.....not "it cost $1200 w/taxes happy", but more like" for $400 I finally have a truly useful,portable laptop".
I think this UMPC " mark II" will make strong inroads this year...and ASUS is currently in the lead.