.
Nice to hear from you again, Capricorny.
Thanks for the nice mention. A few notes come to mind on this topic:

1. I still use this technique on a Knoppix 7.7.1 LiveUSB.

2. In my case, I usually try to bundle all my own usual tweaks in a single
first additional compressed overlay and then try to operate with a new modest
reiserfs read/write persistence file. The compressed overlay is read-only and
virtually immune to being written-over. The net contents of a new read/write
persistence file is usually relatively small and it's therefore easy to erase
(re-format) and to restore its contents from notes or (my own) memory if it
inadvertently gets written-over and Knoppix operation is obviously corrupted.

3. I'm sure this same idea will work to some degree with other Linuxes, such
as Xubuntu, with minor adaptations such as adding a persistence partition and
replacing cloops with squash files. This provides an avenue to starting with
a much smaller compressed core Linux file than that of Knoppix's DVD editions.

4. In addition-to or instead-of "utu's overlay creation",
the quoted function definition, MakeOverlay, appearing by itself, should include
the notices: "Copyright TJ Hoye 2013, License GPL Version 2".
The script is my interpretation of the content of a debian-knoppix mailing list
post by Klaus K describing how he prepares Knoppix images to include material
in addition to a working version of Knoppix LiveDVD for special occasions.
The GPL License notification is typical of Knoppixes of a certain era.