I found this rather novel:
http://www.picotux.com/indexe.html
You may find the above link interesting, though it uses a 700+ kb installation. Contacting them might get you further info about shrinking it some more. But 512K is really small!!
Also, this looks interesting:
http://nuttx.sourceforge.net/
I'm certainly no authority at all in embedded, however after doing some Googling, it appears that the majority of tiny installations are still on the order of at least a couple MB.
Here's a a somewhat comprehensive list of tiny distros:
http://www.linuxlinks.com/Embedded/Distributions/
Good luck,
Sasha