I found this awesome bit of software being distributed by Metropipe. Its a Linux Virtual Machine based on Damn Small Linux (i'm guessing based on the bootup screenshot, i haven't used it) that runs on Linux or WindowsXP off of a usb drive. All activity stays on the USB key such as cookies, history, cache files and such. It also has a program to SSH to a proxy server so that all communication is encrypted and source IP is masked. The proxy program relies on their server so it comes with a price tag. I'm not sure if the Virtual Privacy Machine requires it to work, but i'm thinking not. It'll run on any rewriteable drive. This is an awesome tool for those who want privacy on the go and an excellent one for looking at restricted sites at the workplace. Now all i need is a USB drive to give it a go. If anybody else tries it, tell me what you think.
http://www.metropipe.net/ProductsPVPM.shtml
Firefox is the included browser, and it comes with Thunderbird (with Enigmail plugins for PGP email encryption) and also has a persistent home directory.

enjoy