If you start anew from Knoppix 7.6.1 DVD and ca 3GB persistent store, you might solve most of your problems for now and a couple of years ahead: You still fit everything within 8GB, you don't need to install so much, you don't have to do so much upgrading, and you have room for installing new applications - which, on the average, will be much more compatible with 7.6.1 than 7.2. (But I have also had to stay with an old version because tools like VMware Workstation didn't run with the new Knoppix.)
BTW, in some cases, bad sectors on hard disks can be mapped out, but personally, I just swap the hard disk for a new one as soon as a problem emerges.