hey man, I'm a bit in the same boat as you are. I went out and got myself a ps3 2 days ago with a 40gb hdd, for multimedia playing purposes. Anyways heres what I've done so far.
I have installed ubuntu linux on it and then I installed vlc media player on it using add/remove programs in ubuntu... real easy.
Even a noob could do the install as long as they take their time with it.
Anyways so far it read all my divx/xvid files I threw at it. It also read my h264 files which were below high definition. Would not read my 720p or higher ones. The reason it wolnt is because no gpu access...
But, that doesnt bother me at all. I figure for my 720p high definition stuff I'll convert to .m2ts format to play directly on the xmb side of the ps3.
Which at this very moment I'm working on to try to figure out everything to do.
So I really cant tell you which linux is better, but if vlc player and xbmc are the only ones that are gonna run on ubuntu and not the other linux's I would say go for ubuntu 7.10.
and go here for ubuntu I'm sure this will save ya hours of research heh.https://help.ubuntu.com/community/PlayStation_3
also check out youtube and type in ubuntu linux. Theres some walkthroughs on there but expect your install to be a bit different and just take your time.
Also if your setup gives you an error about the kernel deal just start it again at that selection list and choose the third kernel down I believe. If it doesnt work just keep trying another kernel selection till you find the right one.
The only thing I want to do now is upgrade my ps3, and I dont know if its safe to do so, like will it effect my ps3 linux speed that I got right now. Cause I want to play online with it for games too