Windows 7 recommended minimum RAM is 2GB. I run one PC with this minimum and it works just fine. I haven't tried with less.
40GB of hard drive space is barely enough for Windows 7 and drivers. Even though MS claims far less of a disk space requirement, if someone's using the PC that's not diligent about removing cab files resulting from updates, you'll be out of space in no time. You will also suffer a performance hit because you don't have much RAM and you'll have little swap space (virtual memory) for applications with higher system memory demands.
Could it run with those specs... probably, but you'll be better off keeping XP on a system like this or running some flavor of linux.