Back in the early 90s I happily ran Linux on my 386 with 4mb of ram. The GUI was through an X11 package called TinyX. If you google for tinyx you'll find a bunch of folks with small Linux distributions that should run fine on the laptop.
If you find one that you like, please do post back about it. I've got a similar laptop in a drawer and I keep meaning to make it useful again. :)
The developer's primary test machine is a 486 laptop with 16Mb RAM. You should choose the IceWM window manager which should run OK, or if not it includes the XD640 window manager which will run on really ancient stuff. The distribution is based on Slackware 7.1 so you can get packages for other software from the Slackware FTP site.
I've used DeLi Linux before, and assuming you're OK with disk partitioning, it's a very easy install and a great, simple Linux distro.