I just discovered this thread. What about installing LinuxMCE on a 32GB or greater USB drive and use the drive for not just HD space, but for RAMdrive as well? Partitions could be:
4GB HD swap
24GB HD storage for LinuxMCE
This way you wouldn't have to reformat the PS3's hard drive at all and unplugging the USB drive will take the entire LinuxMCE OS with it.
I know that flash drives are not typically used for RAM, but in the case of the PS3's inability to upgrade its internal RAM, and the increased write cycle life of flash drives, it's a reproducible investment worth trying at $180 for at least 5 years.
The only contingency is an alternative install CD (for low RAM) for LinuxMCE to install from.
Going back to using the established way to install Ubuntu onto a PS3, it is suggested to use the 2 CD set to install from when installing onto an established Kubuntu computer. I would personally hope that the available RAM will be sufficient to allow the install to complete, even though the wiki says that 256MB RAM is sufficient to use LinuxMCE.
A better question is if the PS3 can PXE boot, then we wouldn't have to install LinuxMCE in the first place!