Isn't all that's required a WordPress Plugin that gives you a page showing the latest posts from blogs on your blogroll, and you have a Twitter clone that people could host on their own servers?
Could throw in some fancy stuff like avatars for the blogs and practical "follow" buttons, but still...
Of course it probably wouldn't scale at first, either, but I think a solution for scaling would be easier to find.
Since Twitter also has RSS feeds, perhaps it could even integrate with Twitter out of the box.
Blogs don't have a "xyz is following you" thing, but perhaps Trackbacks would be sufficient.
