I guess this question is twofold - what's makes or breaks a lite? What features entices you most to buy a full version, and gives you the most enjoyment for your investment in time? For me, I've found that the best lite versions allow you to play an intro/tutorial level, and then 1 or 2 advanced levels for a sneak preview of what you would get. Rogue Planet Free does this the best. Also - Orbital Free, for example, limits your score. I'm very interested in buying the full version now that I'm used to the controls.
Wriggle and Aqua Globs did this - a good way to get even the paid users to download (and keep) the lite versions. A good lite version needs to give enough of a slice of the game for the user to get hooked on it - at least a level or two, or some other sort of cap (# of points/time/missing cool stuff/etc.) The first lite that made me rush to buy the full version was Azkend - that might be a good example (the fact that Azkend is an amazing game also helps! ) Isotope and The Quest (and Undercroft, I think) all let you port data from the lite to the full versions, which is a great feature that means you don't have to play through all the stuff you just finished in the lite version.
It should give you all the time you need to play around with the game's mechanics, but only give you a small amount of content. This way, you get to see if you like the way the game plays and if you want more of it. A bad lite version would be limited in how long you can play for *ahem*GAMELOFT!*ahem* or gives you a completely different experience from the full game. For example, if you were going to give a lite version of WolfRPG and you just gave the chicken kicking minigame, that's a crappy lite version. So just give a good amount of content to allow the player to get a taste for your game and decide if they want more without limiting time or giving too much or little content.
One I would like to add - Canabalt. While not a "lite" version per se, but a flash version on the website with some limitations (not as much scenery and obstacles). It had twitter built in to help advertise the game. I knew I had to get Canabalt right away after playing the flash version for awhile.
It is incredibly difficult to get down, not least because the requirements for a decent lite version changes depending on the game. A fully-fledged platformer is easy to do, just allow the users to play the first world. Even better to allow some secrets to be unlocked in that world to keep users playing and allow them to see that the full game will be stuffed with content and extras. On the other hand, what do you do with a single screen hi-score game? Giving them the lite version is practically handing over the entire game, so then you have to consider extra features for the full game (online score tracking, achievements) but is that really enough to convince users to pay up instead of settling for the free game you've given them? Reading that Orbital comment, I suppose that is one way to deal with hi-score games but I do wonder how successful that is in convincing users to pay up for the full game.
Was going to mention this since I just remembered about it. This is probably the best way to promote hi-score games (providing you can get the word out on the internet). People will want to pay for the iPhone version just for the convenience of having it in their hands at anytime they wish.
So, if you'll excuse me abusing this thread for my own market research, I have a plan for doing a "lite" for our game Alien Swing - it's a relatively simple sort of game, you swing off stuff and there's a never-ending distance game and a puzzle mode in which you figure out single screen problems. Neither of them seem to me to be amenable to reduction for a lite game. So, thinks I, what else can I do with these mechanics and graphics? Well, it turns out, I can think of quite a lot. We could do a game in which you collect fruit, swinging back and forth in in the forest levels and getting time back each time you collect something, or we could do a set of race levels in which you try and cross a certain set of screens in the shortest time possible, or some balance levels, or some levels where you just try and throw the character into stuff from a fixed hold, and, well, a few more ideas. Does this kind of using-the-game-to-do-different-stuff make a good lite game? Spider does it with Hornet Smash? What's your general view on that? And I'm sure it can't be the only game to use the same-but-different approach - is it a better method that offering you up a small part of our game?
You gotta have the right balance between revealing content and keeping away content. You need enough to get the people to like the concept, but not so much that they feel ripped off when they buy the full.
Not sure I agree with all of them, but this is directly from the horse's mouth (Apple): 1. Make sure the functionality you decide to include is complete. Battles that require weapons only available in the full version, for instance, are annoying and irritating instead of enticing. 2. Don't set time limits on your "Lite" version, either for run times or life times. Applications that will only run for a set number of minutes per session, or that expire altogether after some period of time, don't recruit customers so much as leave a bad taste in their mouths. 3. Only display the UI for what your "Lite" version will do. Grayed out menu commands, "more track/car choices" you can see but not select, etc. makes your "Lite" version feel more like a commercial than a product, and an annoying and ineffective one at that. 4. Do include information about your full application, including an option to buy, in either your application's About section or on the splash screen. Just make sure the option to continue using the "Lite" version is there as well. A good impression lasts forever.
Never tried this because I also owned the game, but iDracula had a nearly impossible survival version for their lite. Basically it was designed so that a player can really ONLY play so much of it, but understand the game mechanics quite a bit. This is close to what you're suggesting, but not quite. Rope n' Fly included only a tutorial non-high score level in its lite. I wasn't a fan of this myself, and I don't really know if it worked (didn't for me)