Hello all,

I'll be resurrecting this site soon, but right now I have this to offer:
http://web.archive.org/web/20120211095520/http://bitcoinvm.bitcoincommons.org/?q=node/3

you'll find instructions for setting up an encrypted file system.  Keep in mind that all of that was written before encrypted wallets.

A virtual machine mainly provides "security through obscurity" (http://en.wikipedia.org/wiki/Security_through_obscurity)

I can tell you that one of the frustrating things about maintaining a VM like this is the amount of disk space required if you're going to use Bitcoin-QT.  At this point there are other clients to choose from that I believe would consume fewer resources.

Speaking of Bitcoin-QT, I don't know that library dependencies it has vs the old 3.x bitcoin client, so additional tinycore libs may need to be added.