While investigating the creation of my own Knoppix distribution, I encountered a reference to the FreeSBIE project, which is a LiveCD version of my personal favorite OS, FreeBSD. With minor digging, it appeared that FreeSBIE takes a similar approach to Knoppix, and uses a compressed ISO image. This requires using 5.X and the new GEOM disk subsystem, and the details are here. Nifty! Basically, you can mount a compressed ISO file system just like any other device using the geom_ugz kernel module.