Actually you can get away with missing a lot of the stock files if you don't need the MS dashboard for anything. I found that out accidentally when I used an installer disk on a blank drive and forgot to install the MS stuff and it worked for months before I realized it. I was using it strictly for XBMC.
I thought I remembered reading that you couldn't run with any of the partitions smaller than stock, but I'm not sure if any serious effort was made in that direction.
I was looking into running from CF a while back and decided that after adding the CF/IDE adaptor you can't really get the package much smaller than I did with the laptop drive. CF is also really slow compared to a hard drive, even using the CF microdrives. You'll probably have double the initial boot times, but after that it should run fine.