The LNX-BBC is a really cool proof of concept. For your friend, though, I'd suggest something less oriented toward technical problem solving. The [link|http://www.knopper.net/knoppix/index-en.html|Knoppix] bootable CD is very much an end-user oriented Linux-on-a-CDROM distribution. It's not entirely prime time, but the platform it provides can probably be readily tweaked, and for all but the most computer-phobic should be quite useable and an excellent introduction to GNU/Linux
Point being, there's an "insert and run" version of GNU/Linux. Has KDE, GNOME, and WindowMaker installed. It's got OpenOffice (though the German-language localization -- one of the NQRFPT issues, at least in the US), and has recent browsers. What it does really well is autoconfigure for the available hardware. Thought it won't run X Windows on VMWare :-(
My thought: a plausible case could be made for setting up a system to update such disks on a regular basis. The OS runs from a CD (or DVD), local storage is, er, local storage. Lack of R/W support of NTFS is something of a PITA, but for the Win9x crowd, MSDOS/VFAT are well supported. Add some means to save local stateful data (eg: user configs), and upgrades simply become a subscription service that mails out a new CD as needed (monthly, quarterly, annually). Could be an interesting business migration-to-Linux model.