Yeah its a good idea, as others have already said its now possible ( even easy ) to get an xserver running on any random hardware rig that will load & utilise the correct hardware accelerated drivers, proprietary or otherwise. Take an existing liveCD distribution, trim out openoffice, gcc and the other devel tools, apache, mysql, media players etc even kde/gnome and you should be able to get quite a small .iso, leaving a bunch of room for the planeshift binaries and art files.
The major drawback of a LiveCD, the inability to permanently store documents, images, etc ( less of a problem now with UnionFS and the like ) that are created or modified while its in use is not even a problem from the planeshift point-of-view, as all character profiles are stored server-side.
Compile things for a generic enough arch ( ie -march=i586 ), and it should be portable enough to work on most hardware, even the 64 bit opteron/athlon64/P4 chips which still retain backward compatibility for 32bit code.
Put in a nice Planeshift splash screen that grub loads at bootup, a graphical boot manager thingy with a progress bar and a few slideshow-screenshots of the game, and have it launch the xserver followed by psclient in full screen mode. Even the audio drivers should work out of the box as alsa is a generic interface, the hardware specific modules that alsa talks to can be autoprobed, then openal takes over and its game on!
The RAM is really the only sticking point.. I have no idea how well this would work in practice, because ideally you dont want to touch any local disk for swap space, which means planeshift + loopback mounted uncompressed-on-the-fly filesystem must be memory resident.
