Well, I just load the whole system into RAM - Feather's small enough for that to be viable. However, what you can do is create a system of symlinks that link back to the /KNOPPIX directory in the ramdisk, and simply have any new files be installed on the ramdisk.
Something along the lines of:

cp -srd /KNOPPIX/usr/ /ramdisk
ln -sf --target-directory=/ /ramdisk/usr

But still, an overlay filesystem (such as ovlfs with SLAX?) sounds good, I think it would make a good addition to Knoppix if it goes well with cloop.