I second eauster's suggestion that you run Vector Linux 5.8 Standard with a lightweight window manager. jwm, pekwm, icewm, fluxbox, afterstep, and WindowMaker should all run acceptably on your machine. It's just a matter of personal preference. jwm and pekwm use the fewest resources and should be fastest. Another suggestion is to avoid (and possibly uninstall) very resource intensive applications. Use either Dillo or Opera for your browser. Forefox will be very slow and Seamonkey will run slower than molasses going uphill in winter. OpenOffice is not a consideration on your machine but AbiWord and Gnumeric should run well enough. SIAG Office is even lighter and faster but doesn't have good support for MS Word and Excel documents. Don't even think about the optional games pack, XaraLX, or most of the multimedia apps.
I've gotten good results running 5.8 on a Toshiba Libretto SS1000 (233MHz Pentium MMX, 64MB of RAM) so I see no reason why you shouldn't.