I found someone selling an old laptop for very cheap: 128 MB RAM, 266 MHz PII, 2 GB HD. Is it possible to setup such a device as a dedicated word processor? Essentially: minimal

Yes. I use an old fujitsu p1@166mhz, 48mb ram and a 1gb harddrive. Combined with a minimal slackware install using window maker.

Wordprocess in a modern GUI style? Possibly, with a very lightweight WM distro fitting into 2 gig with almost no extra apps games wallpapers or other fluff included. Cpu ram and disk might chug a little but not too bad consdiering the old kit. Overall wouldnt be stellar but it'd work. Think xubuntu or another even more stripped out distro, there are lots to peruse at distrowatch.com

Or... Write in a vim/ed style with just enough loaded to start the console and put you into a text editor? In which case its ok even at its venerable age since theres no gui overhead.

snowtigger, are you able to run OpenOffice.org on that system? Website says it requires 128 MB RAM, does this mean system will goes nuts if you max out RAM?