Actually yes, I do see the external as mmcblk1 using 'Y'
I tried it and for some reason it wants to boot to the recovery image (it shows the 'install failed' screen). Renaming the new image uRecImg hangs the boot process (surprise!) but further experimentation is required. I also tried varying the init.rc in the uRamdisk to mount mmcblk1, to no avail. (Not sure why that would have worked, anyway...)
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Mmkay it works now. I burned an image of the internal memory onto the SD card, then replaced the kernel with the one with that one flag set differently. I used the stock uRamdisk. I copied all of the .bin files from the nooter image, overwriting the old u-boot configurations. Attached are my uImage and all the things I copied over. Just paste all that into your SD card's boot partition and it should work.
When it boots, it displays the nooter instructions screen, then switches to the nook boot animation. Clearly this is not ideal and I or someone else down the road will have to bite the bullet and actually remake uBoot. (^;
Performance is horrible; it made me somewhat depressed. Immediately after booting you are greeted with a boatload of 'Not responding' notifications. If you choose 'wait' on too many of these then the nook will freeze (or something?) and you will be thrown back to the boot animation for a brief period before the screen locks. Unlocking the screen also takes quite a while longer than it normally would.
At any rate, I left the system up just long enough so that I could establish some checks to show us that it was indeed running completely off the SD card, and it was.
I guess there are two major things we can do to improve our current situation:
1) Make the system less dependent on swap and whatnot so it doesn't hit the disk as hard, make more stuff run off of what little RAM we have.
2) Rebuild U Boot for this usage case.
If that didn't make sense to you I'll write up a guide on how to do it start to finish
Here