zisofs may be a better solution anyway. The compression may range a bit lower (or higher, depending; it's higher than squashfs for binaries IIRC, but not for /etc), but it has its advantages:

- Contained files are individually compressed. Damage to an area containing an app you don't use is ignorable, whereas squashfs and cloop may skip and have major problems in surrounding data
- Some machines appear to (in my experience) have trouble when the CD spins down and they try to access a loopback FS on it; if the drive takes too long to spin back up (as mine does) the cloop can begin to bitch about not finding the media. I don't see why; the only flaws that cause this would be elementary and i'd think nobody could screw this up.
- zisofs based livecds can be updated and customized versions can be distributed using jigdo to prevent redownloading entire images.
- Some space can be saved by crafting the CD so that the data outside the knoppix uses the same binaries as inside it (symlinks). This is not possible if those overlapping binaries are inside a squashfs or cloop.

I personally like zisofs. Porting it to the LZMA redundancy eliminating algorithm may be useful (what 7zip uses) and may allow more Knoppix data to be squashed onto a CD.