HD Install :: DSL on PC104 stack hd-install help

Ok here is what I'm trying to do: we have a pc104 stack with 256Mg hd and i think 128mb or 64mb, cannot remember b/c im at work. Now we need to install a really small Linux OS to the HD because this is going to be inside a Submarine. We dont have room for a USB-pen drive to be sticking out of the stack to run DSL off of.
So basically what i would like to know is there a way to make the HD-install smaller than 250mb? I've been looking around and thats what it seems it gets uncompressed out to.

At the moment I have Puppy Linux installed, but I have to remaster it because it comes with stuff we do not need and we need to install Java environment on it.

original here.