Wii Linux

Either way you'd still develop the exact same system, only minus the loader and using a different loading media. Just semantics really.

I will start a cross-compilation now, if it compiles you might have a chance using LFS. The only difference is no package manager or anything built it. Extras could be added easily enough.Just a overall less bulky vanilla linux.

If you use SD for the system maybe you could add SDHC to the kernel or something.

Personally I think the LiveCD idea is great... But it's dependent from drivechip. Anyway, remember Wiigator loader is pretty much a hacked version of GeckoOS.

in case you lot were interested...
The latest wii-linux kernel supports SDHC
No one has written a wifi driver yet and probably wont be written for a while... hence muzers decision to try and add support for USB wifi adapters
The xorg drive can be found on tehskeen
There is around 66mb of ram available
You will not get KDE running on the wii.... at least not in any usable state

I still suggest you use wii-linux as a base and build off of it similar to how muzer has done... but remember you need to keep everything lightweight...