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I think the point was that you could fit all of DOS on a boot disk (i.e. a fully functional version of the operating system). Of course, fully functional isrelative, and in the days of DOS that sure didn't include graphical desktops or anything like that. True, you had Windows 3.x, Desqview and a few others, but those were third-party add-ons and not widely considered to be part of DOS. Now a days, though, graphical desktops are considered part of the OS.
Boot disks have been around since their were disk drives, though. A LiveCD is simply a progression of the boot disk concept, it is not an innovation. I find the comparison of LiveCDs and boot diskettes to be completely apt.

A better example of an OS on a floppy would be the original Macintosh System Software. They managed to fit an entire GUI into a 400 kB floppy diskette and something like 64 kB of ROM.

I haven't played too much with Macs that old, but I have used machines that could fit the entire GUI and a modest sized application on a 800 kB floppy and 256 kB of ROM.

The big problem with finding innovation in the open source domain isn't finding it. The problem is finding innovations that people would want to use, because they want to use the sort of software that they are already familiar with. So desktops end up with the look and feel of Windows or Mac OS X, and OpenOffice is popular because it looks and feels a lot like Microsoft Office.

I've used open source programs that have no analogs, that I'm aware of, in the world of commercial software. A lot of that software is quite good. Take something like wmii as an example. But very few people want to use it because it doesn't work like the stuff they're used it.