Not too bad, BoXXi....but...
Since the OS actually knows where the system.ini file actually is, and by finding it to read it and determine what shell to load, it is already in the root directory of the OS, namely c:\windows, and doesn't need to be told where explorer.exe is, cos it's in the same folder....

There's typically no leading spaces in the path statement, either....
So ignoring case-sensitivity as an issue, [which it isn't]...this would be the typical entries....
shell=Explorer.exe
This needs to be changed to:
shell=C:\Litestep\litestep.exe
The Windows kernel and registry is totally oblivious to the litestep.exe proggy, so the full path MUST be included....if not, no shell, no GUI, no fun...