yep, you can forget about gnome or kde.
Usually I would suggest xubuntu, but I think even xubuntu would have to struggle. Try to get more ram, as you will probably get it for free. (I gave away two complete 500mhz pc's this year) - People are throwing away much better systems, so you might get something for a dollar on ebay.
I can't second things like DSL or Vector linux. If you take a well supported distribution like suse, ubuntu, debian and so on, and take windowmaker, fluxbox or the like as a window manager you will get about the same performance.
If you try (x)ubuntu, make shure you get the alternative install disk!
Suse will let you choose the window manager during insallation.