I would use this if it didn't depend on OS-specific features. Squashfs is not portable to Windows, unless you extract it to disk.

I actually prefer the jar/Tomcat model, where the read-only image gets distributed to servers, and when you run the app the image gets unpacked to disk as needed. You could also write I/O wrappers that would obviate the need to extract them to disk, and you could even make compression optional to reduce performance hits.

It seems like all you really need is a virtual filesystem implemented as a userspace i/o wrapper. Basically FUSE but only for the one app. There's no need for the FUSE kernel shim because only the application is writing to its own virtual filesystem. So this would work on any operating system that supported applications that can overload system calls.

For example, I would start with this project http://avf.sourceforge.net/ and modify it to run apps bundled with itself. With FUSE installed, other apps could interact with its virtual filesystem, but without FUSE, it could still access its own virtual filesystem in an archive. I would then extend it by shimming in a copy-on-write filesystem to stack modifications in a secondary archive.