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Just to clarify, rumors state that 720 will have 4 gig for games and 4 gig for "other stuff", not just the OS. There is a lot of speculation that 720 will be doing lots of things beyond games. The OS could use up 2 gig, while skype, your cable feed and DVR, your always on connection and other features could be using up system memory while 4 gig is blocked off for games. This is all speculation on rumor, of course.

The point is, if games are designed to run on 4 gig of memory, it's not a crazy stretch to say they can run on 1 gig or so. Whether 3rd parties support Nintendo is a whole other matter.