this whole thing should be possible to accomplish. hmm.
perhaps a remastered damn small linux CD, but that is 50Mb...
if you remaster DSL and put a resent Kernel in i think much of your work is done.
then perhaps you could cut away the X environment and some servers, software...
a 20Mb environment should be possible.

OH and the CD is bootable so... not much need for loadlin. if it is not OLD hardware. like p1 133Mhz with 16Mb ram and such.