I've done LFS and I would highly recommend at least reading the guide (even if you don't attempt the process) to gain an understanding of what constitutes a normative linux system and how it fundamentally works.
The point being: if you want to "chop" it, you are being silly and wasting your time by looking around at small distros. You can take "just the essentials" from any distro and make them work on any scale: I've built systems that ran off a pair of floppy disks (that is, less than 3 mb, which isn't even a standard issue kernel), complete with (console based) file browser, editor, networking, and web browser. They were source built, but the starting framework was fedora (which ain't considered lite or small). Adding gcc and development libs is more space, of course, but if you move up to a CD you can have whatever you want.
Anyway, two important things:
1) get comfortable rolling your own kernel.
2) learn some bash scripting and get a grip on how the /etc/rc (or /etc/init) scripts work. They're called runlevel scripts -- for that floppy deal, I had to write them all myself.
Again, just to emphasize, LFS is a totally excellent guide to all this. The idea behind LFS is NO DISTRO -- ALL SOURCE.
