well,
as far as the hardware issue goes, I don't  find any problem with the
size and power consumtion.
I am working on a similar project, only difference is that it is for a
different task of talking out books.
there are very small size embedded boareds with built in processors
and ram and sound/ display cards.  the bios supports booting from a
compact flash card or a usb pen drive.
I will grab the small embedded computer board in next fort night.  I
will let you know how it goes.
the idea is good and right now even I am trying to build a kernel that
will only have essential modules to boot off a pen drive along with
usb support and sound card support.
when I get it working I will let every one interested know.  I am
aware that it is not too difficult but it is not too easy when it
comes to implementing the same os on a usb device.  I am not going to
use any ready made os like slax or puppy linux.
for such tasks one needs to compile their own kernel.

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