I would think that booting the full OS would be faster off CD, unless you've a very quick network. Of course a W2k install takes about a gig...bootable DVD RW? Perhaps it could be stripped down to 700MB. Can the OS run off a read only (in BIOS) hard drive (no swap file of course)?
If you had a second HD that was mounted R/W then you could put your swap, user files there. Of course you'd be limited in any of these situations in tha t you could not install any (registry-modifying) software beyond what's on the boot image.
Perhaps a well locked down 2k machine would work as well. You can do a zillion things, like lock or remove desktop icons, disable the mouse, or leave the user with no OS modifying permissions. You can even limit what programs are run to a pre-allowed list. I guess it all depends on what your 'demo' machine is demo-ing.
-Zeke
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WWFSMD?