For the smallest possible system a distro is not going to help you. You need to build the system from scratch with *just* the stuff you need. If you want to try it, look here:
http://www.linuxfromscratch.org/
I've just started looking into doing this myself as RedHat puts too much crap in their distro I just don't want! My current RedHat 9.0 linode uses almost 10MB of memory for each apache process! I have a feeling I can get that down to a more useful number doing thing myself and leaving out pieces of apache I don't need (like WebDAV). If it works, I won't have to upgrade to a linode 128. Yay! (Sorry Chris, I love the service but I'd rather spend my money on beer instead of an upgrade to a 128MB linode.)
--James