Choice of DOS
The first is PTS-DOS, which is an embedded chip-based DOS compatible with MS-DOS 6.22. This means there could be storage up to 2 gigs. Alternately, DR-DOS is for sale or could be lisenced for use on this console. It supports hard drives up to 137 GB.
Motherboard and chipset
VIA Technologies is a Taiwanese company who does chipsets, memory, and motherboards. My dad has worked with them for chipsets before.
A simple serial, or even USB driver could provide the game controllers. Alternately, a keyboard or mouse could be used for more desktop based applications.
Flash ROM has come down in price in the last few years. Because of the widespread prevalence of CD burners, optical media would probably not be preferable. A memory card of 8 or 16 MB would be sufficient for game saves or personal settings. For the hobbyists, a programming cartridge could be available with development tools on it.
There are some really great development tools available, like the DJGPP compiler and the Allegro game library. My only concern would be licensing open-source software could lead to problems, but on the other hand would also attract hobbyist programmers.
An ethernet port would be a valuable add-on for streaming media, playing games online with friends, or for something like a chat client or internet browser.
I think the target system would be 200 mhz with 64 MB of RAM. The target specifications would fit the needs of a high-end DOS machine and would also be very versatile.
I would love to hear any feedback or suggestions you may have. I think this could be done cheaply, be very versatile, and of course entertaining. :-)