Comment by Findecanor

A "1.44 MB floppy" has that capacity for files when formatted with the FAT file system from MS-DOS. The unformatted capacity is actually closer to 2 MB but a proper file system has disk-space overhead for metadata and check sums.

You could have a file system with much less disk-space overhead than FAT, and there are many out there. A demo disk would typically be read-only, and in particular there are some read-only file-systems that are really space-optimised,

Another option would be to treat the disk sectors as a single compressed file which the bootloader decompresses into a RAM-disk image which the OS then boots from, but that would require a bit more than 2 MB of RAM.