I recently installed Ubuntu on a similar machine: a 7-year old 500 MHz tablet PC featuring 256 Megs of RAM. The PC came pre-installed with Win2k, it was not a pretty sight (slow, BSOD'd several times per hour).

Default Ubuntu installation comes with Gnome, which is a pig for memory usage. The resulting desktop is barely usable... startup Firefox and watch your desktop die.

One 'apt-get install xubuntu-desktop' later, I had a similar desktop running fine, very responsive for such a machine, with a usable (albeit slowish) Firefox.

What I plan to do is: dump the Xubuntu ISO to a USB key, make it bootable, boot off the key on the MicroClient and install the OS on a CompactFlash (1-2 Gb should be enough). Data will be stored on an internal ATA disk, together with all temporary or write-intensive directories like /var. I plan to leave the machine running 24x7 anyway.