how interesting that you posted this, I am currently in the same dilemma (toshiba laptop, 233mhz, 32mb ram =D )
i've been messing around with it for the past few days, trying to get it going at a decent speed.
i've tried:
debian sarge: linux kernel 2.6.8. I did this because I was using it as an X-terminal, and i needed 2.6 for wireless. Don't even try it if you want to run X with any sort of client.
debian sarge, linux kernel 2.4.26. This works a bit better, and the machine is fairly functional (albeit very slow). My wifi card is supported under this kernel as well.
come to think of it, i had debian woody installed on it a long time ago. I was using the 2.2 kernel along with gnome 1.4 :-P. It was nice, mostly because of apt-get. And it ran well. I really only used it for playing music and surfing the internet. I tried various music players, xmms and a couple of mpg123/ogg123 frontends. They all worked quite well, as I recall. Decoding and playing used up about 30% CPU. And really, 2.2 was well usable as a normal laptop.
My advice is debian woody, since it's still easy to get ahold of and works fairly well, plus you have the advantage of apt-get. Although any other distro would work fine. However, I would still strongly reccomend using kernel 2.2.
/**EDIT**
Oh, and I just thought of something. I don't know how important a gui is to you, but if you're OK with using the command line, there's a great console/ ncurses media player called mp3blaster which i found to be very easy to use. Ditching X would definitely help with the resources problem
. And besides, if you're just playing music, it's so much easier to hit a button on the keyboard than to click a button on-screen with a mouse.
another thing you might look into is a live distro called geexbox. The CD image is about 7MB, and is loaded into memory when you boot up. It has a dvdplayer-like interface, which i don't really like for playing music, but it might be something to check out, nevertheless. Being a live distro, this would be the easiest one to set up.
**EDIT**/
hope this will help,
-brandon