Litestep has to emulate the desktop icons as they are part of the Explorer shell. There is a decent desktop icons module called IconDesk, but that apparently doesn't work on 9x. Since you are running Win98 you have deskfolders running. It works on 9x but is quite buggy. That may explain the cut off titles.
About the missing icons, you need to edit "desktop_icons_9x.rc" in litestep\themes\austerity\config. Especially the size() parameters in there.