(wherein I learn how to multiquote... sorry for the email notification spam!)
Anything, really. Any device that the kernel can recognize as something mountable. I think you could even make ext4fs images in files on a FAT32-formatted SD card, if you really wanted... depends on whether the fstab for your rom allows mount options though, I suppose. I could, for example, make 5 sets of /system and /data on a really huge SD card and switch between 5 different ROMs, each of which I modded to boot off of its own pair of partitions.
I believe fastboot is built into the chips in the device itself -- think of it as analogous to the BIOS on a traditional PC. You can get into the BIOS without any disks connected, and it can try to boot an OS. Fastboot is a low-level interface to let you write the recovery or boot partitions, or even boot an image on the fly (which is what I'm doing).
A boot.img is just a packed up ramdisk and kernel, the two pieces necessary to boot a Linux system. When I do `"fastboot boot kernel.gz initramfs.gz", the fastboot command on my computer transfers the ramdisk and kernel to the device, which stores them directly in memory and then executes the kernel. The internal SD is never involved in that process.
Ooh, check it out, this thread made xda's front page!
An update: turns out that running fastbootarm on my phone doesn't work -- no idea why, but it can't see the tf701t. So that left me back with a "tethered" solution (what is this, a jailbroken iphone?!). I built a boot.img out of my modified ramdisk and kernel (using mkbootimg from the android SDK) and flashed that to the tf701t's internal SD using fastboot on my computer. That worked the one time I've tried booting off of it, so provided my internal SD doesn't completely fail, I can boot without my computer. If it does fail, I'll be back to tethered -- but at least I don't have a coaster
My class 10 card is fairly fast, but the system does get hung up on IO fairly often (thanks, Cool Tool!). I'm thinking about one of those sandisk extreme pro cards rated at like 80MB/s. Still, the tablet is far more usable now than when it was a paperweight