what win98lite does is to remove ms internet explorer. It also replaces the win98 taskbar and startmenu and explorer with the win95 version. Probobly it does some more things but i dont know what. Its a little bit faster that win98 or me original but i dont know how much.
With win98pro (it think the pro version of win98lite is called that) you can reduce windows to 50 MB.
Pentium II 266 MHz, 32 MB RAM, 2 GB HD, network, IRman, modified
keyboard, 2*40 LCD, WinMe with Win98lite, Girder.
Why not just install Win9x and select the "Custom" install setting and select/deselect what you prefer? You can also delete MS IE after installing Win9x. Unless you plan on calling it, I don't think it'll be a problem. However, the custom installation is the way to go.
I agree with Jaymz, but I would recommend that you do 98lite from a new windows install. That is you run the 98lite program DURING the win98 setup process. That way you ensure that your install is as small as possible. You can get things down to 50MB nicely, the exact number depends on the hardware in your system/drivers that need to be installed....
With a 120mhz/32MB ram maybe your first option should be another 32MB ram, since windows is much happier with some room to move. And obviously a faster CPU will help bootup a bit too.