I have done a lot of delving into this stuff, and it has it's pros and cons. The new formfactor called "Mini ITX" is a super small board with an onboard processor, video, NIC, sound, whatever. Many have RCA style video outputs, lots of open ports and stuch.
Problems are... The processors are slow in comparision of modern standards. The latest board is only a 1Ghz. Also, the bus and the onboard cache is wee-small. Only 64 onboard cache if I remember right, where 256+ is standard on most intel and AMD chips. They also only have 1 PCI slot via riser card on most boards. They only support SDRAM, so forget the high speed DDR stuff.
The plus - super small. The box made by casetronix is about the size of a set top box from your cable company. You'd never guess it's a whole computer.
For a use like this, you'd probably be better off long term getting a small-ish mid tower case in some stylish color or style. Then you can put full size ATX boards, drives, CD's, DVD's, whatever on them. A lot of the new ATX boards have optical inputs for sound and everything.
As for "embedded" L*, unless you really know what you're doing, it's probably more hassle than it's worth. I doubt you'll find a driver for the latest super video card that will be compatible.
Hope that helps.