the trick is to be frugal with what programs you choose to run concurrently... and opt for "lite" versions if possible, to minimize RAM usage.
My parents are using my old Dell L400c 400mhz computer with 512mb ram (we maxed it out; originally only had 128mb because prices were so high back in the day!) and they are using WinXP.
You might want to check the documentation of that computer for the maximum allowed RAM on the mainboard; you might be able to slap some more in there, which would certainly help performance-wise!
Also, a USB 2.0 (PCI slot) expansion card would help if the kiddies want to hook up flash drives, and a separate video card (PCI) would take some stress off the CPU.
But without any tweaking at all, I don't think you'll see any problems with your current setup.
Have fun with it! You might also want to try Xubuntu, which is a 'fork' of Ubuntu Linux.
Xubuntu runs well on legacy machines, and can be run via "live cd" meaning you can run it entirely from the CD-ROM drive and the available memory. Reboot the computer without the CD in the drive, and you can go back to Windows. It's worth a try!
~Branson
