To follow up, I think it may be an advantage to do as much as possible before starting the remastering process. That implies doing package installs, upgrades etc the "ordinary" way as much as possible. But how to, within 4GB space? No way there, but we don't have to confine ourselves to FAT32 and DVD limitations.

I just tried out expanding knoppix-data.img to 8.5 GB, and that works well on ext3. I place the Knoppix package on an ext3 partition and run from there, starting from USB with the fromhd= cheatcode. I'm not sure if there will be some kind of performance problems with large loop-mounted images, but I haven't seen any so far. So I will try with an even larger persistent store, allowing me to do more comprehensive installs and compile large programs.

If we, after cleaning up and remastering, get outside the 4GB limits, there are several ways to still use USB sticks as basis. The simplest is to format the stick to ext2/ext3, install (for example) GRUB on it and just dump the Knoppix files to it. Somewhat more elaborate would be to split the compressed packages on two volumes, or work with several uncompressed volumes - that has worked just fine for me.

I think using Linux file systems on sticks is very practical. For exchange of data with other platforms, we can set up a smaller FAT (or even NTFS) partition on the stick, and have that partition automatically mounted on boot-up. Typically, a 16 GB stick could be partitioned into 15 GB ext2 and 1 GB FAT32, the ext2 volume: 4 GB compressed, 10 persistent and 1 spare.