Quoting Mathew Brown <[EMAIL PROTECTED]>:

  I was wondering if it was possible to install grml on an encrypted
  root partition and with an encrypted swap partition.

Yes, no problem!

I plan on
  installing grml on an external USB drive and since it can be stolen so
  easily, I'd rather protect my data using encryption.  So is this
  possible?

Yes too ;).
If you only want to protect your data, ecryptfs only for your data would imho the best option (ecryptfs is a stacked cryptfs, so no special cryptocontainer is needed).

According to http://grml.org/grml2hd/grml2hd.html this can't
  be done but that web page hasn't been updated since Jan. 2006.  Any
  ideas?

grml2hd doesn't support this directly, but it is easy to upgrade a grml with many different encryption schemas.

If you want real encrypted root you should use cryptsetup-luks, so every single bit except /boot is encrypted on your stick (/boot has to be on a seperate partition). Just create the encrypted partition and install with grml2hd on it (afterwards you need to configure grml to be able to boot from it) [1].

If you want to protect your sensitiv private data just use ecryptfs on the folders you want to encrypt.

Encrypted swap is just 2 lines of config ;)[2].

[1]: /usr/share/doc/cryptsetup/README.initramfs.gz
[2]: /usr/share/doc/cryptsetup/CryptoSwap.HowTo

cu,
michael

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