I like it too. I think it's an improvement over regular hangman. I would be in favor of a small tweak to assist in letter location, something like what Lex suggested. Otherwise it feels a bit like random letter guessing for a while.
But, it has been only one game so far. Let's see how it goes. [/ramble]
As I've grown older, I've found that my memory is not as good as I used to think it was.