1. You can put whatever Linux version that you like. Personally, I'd put RedHat since I've been using it.
2. You can make it as whatever server that meets your needs.
3. You need to have a CD-ROM to install Linux, right? I used my 52X CD-ROM to install RedHat, then I removed the CD-ROM. I have a P133, 96MB RAM, 4.3GB HDD, and it seems ok to me. It depends on what you want to do with it. Of course you can't use it as a commercial web-server.
4. You can set it up as a file-server for your MP3 storage.