After many, many hours of wading thru this board and surfing my brains out, I have to say that your suggestion fits best with my own research, i.e. the shortest route to a diskless terminal is Jailbait on the Sandisk running VNC for linux over a network connection. But what has discouraged me from trying this is the 800x600 resolution of the IO vs. 1024x768 I usually run my PIII desktop.
Also, as I have no Linux experience whatsoever I've finally decided to "stick with what I know" or at least what I have the most experience with and which will involve the shortest learning curve, namely Win98SE. I already installed a 128Mb SODIMM ($50 at Best Buy), have a Winchip2 ready-to-install (I have the V1 bios), 98lite (tho not cuz I need it since...) I've ordered a 2.5" 9.5mm drive (4G Hitachi only $79 at computergeeks), and also have a fan and USB-to-Ethernet adapter (Netgear just $32) on order as well. Hopefully the motors will not be too loud, but with all the help on this board I'm confident that it will come-up and run easily enough. But now that I've listed this stuff I realize I'll have spent another $250 by the time I'm done (over and above the $400 I sunk into it initially for the IO and a yr's service for my Mom). Not a cheap computer by any stretch, but a cute little bugger nonetheless!
I'll miss the simplicity/convenience of the NPLI service but it'll also be good to use the same apps and OS everywhere around the house. Next I'll take a deep breath and install my Enet card to my Tivo box as well!