Knoppix (developed by Klaus Knopper) ended up using the cloop driver, which Rusty Russell originally wrote for LNX-BBC. It added transparent gzip compression to the loopback filesystem mount concept and I think it allowed us to ship about twice as much software on a 50 megabyte CD-ROM! (And similarly, Knoppix could then ship about twice as much software on a full-size CD-ROM.)
In general, doing better than raw ISO9660 for read-only file storage was an important challenge for would-be tiny live and embedded Linux systems. I think there are several things that have followed cloop, directly or indirectly inspired by it.
I think you could still do quite a lot with a live USB system today. At Linuxcare we heard from a lot of IT desktop support people who were regularly using the bootable business card to fix/back up Linux and Windows systems, or sometimes for forensics, lost password resets, or other creative applications.
Edit: Knoppix existed slightly earlier than the Linuxcare project, even though it adopted that one particular cloop technology from us. I think it was probably an inspiration for the Linuxcare group. I don't know my Knoppix history very well, but I think I saw some form of Knoppix as early as 1997!
Edit 2: According to Wikipedia my recollection may be wrong because the first known official Knoppix release is 2000 (though that's version 1.3, so maybe there was a 1.0 sometime before that?) See https://en.wikipedia.org/wiki/Knoppix and https://en.wikipedia.org/wiki/Klaus_Knopper (amazing to see that Knoppix is still being actively developed to this day!).
Edit 3: Thanks to someone elsewhere in this thread for mentioning tomsrtbt by Tom Oehser (http://www.toms.net/rb/), which was also definitely an inspiration for the Linuxcare distribution. It had the motto "the most Linux on 1 floppy disk", later modified to "the most GNU/Linux on 1 floppy disk". While it didn't have a GUI, like the QNX floppy, you could do quite a bit with it!