0) Damn Small Linux is 50MB in size, install it somewhere and install bitcoin on it.
1) Encrypt the disk/file.
2) Use a Cloud-based service like JungleDisk.com to backup your wallet/distro. It costs $5/month & the first 5GB is free.
Good idea, although DSLinux can be tedious for beginners. But I like the elegance of your solution.
One potential problem: If we think long-term, DSLinux-version.today might not necessarily be able to boot on modern hardware in a few years.
Don't forget Puppylinux...
It also boot in Gui, sadly it only have restricted locale, but it's very nice, atleast those times I've tested it.
Post #5... Yay... Only Wait remains...