Lubuntu 10.04 (the LXDE based version of ubuntu) is coming out soon (with the ubuntu 10.04 release). It should probably run alright with those specs. It will have the benefit of ubuntu compatibility. Unfortunately, xubuntu (the Xfce based version of ubuntu) is slower than it should be.
Also, openSuse with LXDE or Xfce would probably be fast enough. You could try Fedora with Lxde or Xfce as well.
I would stay with a mainstream distribution for a support reasons (large amount of software, easier to get help, etc.). Just choose a lighter desktop environment. I recommmend the LXDE or Xfce desktop environments because they are fairly traditional. (LXDE is undergoing some major changes right now, in a couple of months it should be stable. If you need something now I would recommend Xfce.)
If mainstream compatibility and support are not important, then you could try a distro that is itself lightweight and pair it with LXDE or Xfce. Some choices there would be Vector, Zenwalk, (SliTax and Puppy Linux if you want something extremely lightweight), and many others.
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Putting ubuntu, openSuse, or Fedora on a flash drive should not be hard, just search for the specifics. Installing to the hard drive from the flash drive should work the same as a live CD.
BTW, I would do a dual boot and keep Windows; you never know when you might want it. For example, there is no Linux version of adobe shockwave. While the Windows version of shockwave will install in the Windows version of Firefox, and you can install the Windows version of Firefox in WINE, it still will not work.
