I have 512mb of pc2700 memory in my machine and windows 98se works fine.
DOOOOOOOOONTTTTTTTT put on windows ME, its the worst of the lot.
WIndows XP is a very good OS, and will work fine with that amount of ram. I have only just got more from 256, cause XP loves ram. But ram is cheap, £30 including next day del for 256mb PC2700 from crucial.
Failing XP put on win2k, cause u will find it hard to get win2k to crash. winxp is 2k with bells and whistles