There's already a backup recovery image on the NC, which will trigger in the event of 8 failed boots. In any case, you're not doing anything to the on-board software when you make a bootable SD card, so there's no need for a backup.
For cards, SanDisk class 2, 4, or unclassed 8GB and 16GB cards have been found to work well. It's a shot in the dark how well that 2GB card would perform, and it would in any case be pretty impractical.
I've done lots of things with my NC

It's been a few months since I was running CM7 on SD, but yes, it worked just fine. I eventually replaced the stock software with CM7 on the internal storage, and ClockworkMod on my internal recovery partition, and have since repartitioned my NC and set up a dual boot of CM7 and stock, allowing them to share the same SD card for storage.