As Reflex suggested, if you can live with Open Office instead of MS office, then Linux is most definitely the way to go. I tested a whole bunch of the current crop of distros on a 1012 and wrote reviews of them in this forum's linux sections. In my experience, the best suited full distro (not a light one with limited customization) is Linux Mint 9, which is a more user friendly version of Ubuntu 10.04. I also wrote a review of that distro's performance on the 1012.
If you absolutely must have access to windows and it's programs, Then simply do a dual boot of LM9 and windows on your machine, and use windows when you need it (most of the time you won't).
As was suggested, spend the $50 and upgrade the RAM to 2GB.