That's pretty neat! I've heard that the DC is capable of that, but I've never seen it in action. Does it require some kind of HD as well?
(That picture/setup isn't mine btw)
I'm pretty sure you're limited to a RAMdisk, like a USB drive version of Linux would use, and that ramdisk probably takes up a whole VMU... I think you are very limited in running a window manager by this as well, I don't know if X11 will run or not. I think Chinese companies might make some kind of VMU adapter that can run an SDcard in it (they do it for N64), or maybe you could use a third party VMU/memory card with higher capacity.
ALSO NOW I MUST INAUGURATE OUR FAN CLUB IN TRUE STYLE WITH THIS:
You had to know it'd show up sooner or later! lol
I'm gonna go take a few pics of my collection and post them, hehe..