I don't see a lot of value for Isolated Storage except to maybe cache temporarily some images or code locally. Being that you only get 1MB I don't see much value in it even for this. Saving settings in Isolated Storage doesn't make a lot of sense since the user could access your silverlight application from another browser on a different machine.
Plus Settings make more sense stored on the server.
What do you use IsolatedStorage for that I might have missed?
Robert -- the default is 1MB, you (as the developer) can request a quota increase to any amount of available space the user may have. We have some customers using Silverlight for offline media applications and use 750MB of space to store a movie, as an example.
-th
I am not sure if there are other benefits but I would like to look at it using couple of examples.
1) Cache all the page loading data in isolated storage so that the app does not have to hit the server if the page had to be refreshed (like due to popup blocker).
More info here: Using Silverlight Isolated Storage for Local State Backup
2) Isolated Storage is a great alterative to using cookies especially if you are working with large sets of data. Examples of use include undo functionality for your app, shopping cart items, window settings and any other setting your application can call up the next time it loads.
AOL Mail is using it to store mail headers so that browsing a tree control of mail messages is quick.
See this web app ToolToMeet.com of how isolated storage can be used instead of using a central database