It depends on what your primary use for the laptop is. If its for basic browsing, I would recommend or Chromium OS or Joli cloud. They are basically a lightweight OS meant for netbooks.
Chromium is the open source version of ChromeOS used in Chromebooks. Its basically a lightweight stripped down OS with the chrome browser as its main application.
Jolicloud uses 2.2GB when installed, but unfortunately future development has been discontinued. Not too sure what the respective specific min system requirements are though and your laptop seems really old.
I would recommend a HDD upgrade too. 500gb is easily available and not that expensive. Should you retire the laptop in future, you can just get an external case and reuse it as a spare external hard disk.