On my microdrive, I have a 50 megs swap file and 50 megs space left over. But I have updated with all of the windows updates and MSIE 5.5. So that has increased the space taken. I haven't really tried to get rid of files it doesn't need, as now I still have room left.
As you noticed, a swap file helps. The 50meg swap file I have makes a huge difference over none, and a big difference over a 20meg one. The IA-1 is kind of slow, but without the swap file it is even slower.
The video driver .zip file is 9megs, the modem .zip is 5 megs and the sound .zip is a few megs or so. Of course, the IA-1 would only need a fraction of that stuff.
Although as you have demonstrated it will work on 128megs, that is on YOUR computer. I fear that as soon as you put it in your IA-1, it will want a whole slew of extra files that won't be on the flash disk. The only way to do it would be to utilize the extra 16 megs on the internal disk as a place to store windows .cabs
I tried to do an install of windows me by the windows dir over from one of the computers, but even without a swap file, I kept running of out space and kept having to reboot. It kept asking for more drivers. And then a reboot. And more files and reboot. Jeesh, it was frustrating.
Although I think it would be possible with the 128meg card, it would maybe take a number of hours to get it working. I think a 192meg card would be better if you could swing it. At compgeeks they have the 256meg card for $92 versus $59 for the 128meg card.
Hope this helps.