I thought about it. I don't enable Wifi by default to save on battery and there is no built-in ethernet, only through the USB (which has the same problem as a keyboard). My best shot would be enabling Wifi at startup then disabling it with a login script, if I were concerned enough about it. If it had 2 USB ports I probably wouldn't even think twice about it.
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No - Linux sans keyboard at the moment isn't doable. I have a case the PengPod sits in (see Amazon - search Tablet Keyboard Case). The original PengPod does not support Bluetooth - which is fine because the tablet keyboard cases are like $10. It doesn't fit in my pocket but it is still easy to carry. There is a little cord that plugs into the USB. That is what I meant by single point of failure - if the USB goes out my tablet is effectively bricked because I can't log in.
I find I don't need a mouse most of the time because I use OpenBox with keyboard bindings for just about everything, and Vim for most of my editing (which, again, requires no mouse). Linux handles the touch screen just fine as though it were mouse input for when I need it.
The Pengpod 1040 supports Bluetooth, so it is probably possible to pair a bluetooth keyboard with it, again in some sort of tablet case. In fact, one of the bundles includes Bluetooth accessories. I still worry about what the pairing looks like pre-login, though.
For serious typing I usually carry around my happy hacking keyboard. It is small, comfortable, and fits in a backpack.
I own the PengPod 700 and I contributed to this project for the 1040 for an upgrade. Here are some comments I have:
First, the PengPod 700 is great for what I need it for - which is mainly a mobile tablet that boots Linux for taking notes in Vim. I would do the same with a Rapsberry Pi, some USB display, and a battery, but it is all there in one package with the PengPod 700. It fits just fine in a case with a mobile keyboard. Some downsides to the original design: low processor speed + RAM - starting Firefox takes some time, but it still works. I feel like USB in Linux without autologin is a single point of failure - and it has been reported that the connector does suffer. It also doesn't have access to the backlight PWM/GPIO out of the box - so no brightness control, which directly affects battery life, which isn't that great. For what I use it for (taking notes at meetings or on the go), the issues aren't too bad. At $100ish for a Linux tablet, you can't go wrong if you set your expectations right.
Now, I want the 1040 because the specs are amazing for that pricepoint, especially with Linux. I would up my usage of it to playing some light games, spreadsheet, general web browsing - it would really be something that I wouldn't feel bad using from the couch or pulling out at a conference. I still would prefer multiple USB ports, but most tablets don't even have one.
I really wanted an Ubuntu Edge, but didn't really need to replace my current smartphone and honestly I could see myself using the 1040 a lot more. I probably still won't be doing heavy development on it or running WINE (both due to ARM), but I can't really find much that is cheaper from a mobile perspective with the full package running Linux.
I was interested in what your friend did so I did a little research. This type of hunting is called persistence hunting.