Why does a tiny distro like DSL have at least two web(?) browsers? I understand that it has not only Firefox but a browser called Dillo.

I don't use DSL, but I imagine it's so you have a choice of a less-resource-hogging browser than Firefox, which is getting to be a bit ungainly. Less resource use would be in keeping with the "Small" in "Damn Small Linux."

Some distros offer four or more browsers, just so there's a choice. Another benefit, though, is that if you have resources to run more than one browser, sometimes you can do things like fill in forms and submit them, with one browser but not with another. I've had to use Opera several times to accomplish tasks on websites that, probably because they are non-standard (their developers probably had MS Explorer in mind), they could do but Firefox, which adheres rigidly to international standards (unlike IE), could not cope with. It's unfortunate this situation exists.

Dillo is an alpha browser designed to be embedded in mobile phones etc. The executable is ~320 KiB. It is written in pure C and extremely stable. It is brilliant for fast light browsing but has no https yet and no java support.

dillo is not specially designed for mobile phones. https is implemented but not a default compilation option.
imo dillo becomes really useful only with the patches from
http://teki.jpn.ph/pc/software/index-e.shtml
(tabs,meta-refresh,...)

Is Dillo trying to bite into Operas mobile market then?

I've used Firefox, I've used Opera. I've used Konqueror, and I've used IE (*shudder*). Firefox is faster loading IMHO, but Opera seems on par with it otherwise, but I don't think I'd class either as "lite". Maybe in Firefox 2.0 they should reduce code size, system req., ect and just basically minimize the code.

Linux, from my experiance, is alot about choice, hence the numerous programs you'll have for one thing (package managers, browsers, file managers, ect.).