Looking at knoppix-image, all the way down at the end... I see this bit of code.

Code:
case "$SELECTION" in *overwrite*)
 [ -z "$OLDHOMEDIR" ] && rsync --update --exclude /ramdisk/etc/mtab -Ha /ramdisk/etc/ /UNIONFS/etc
;;
esac
I guess the point of that option is to use the /ramdisk files as the source and put them into the persistent home. I recently ran into a situation where I tried using a knoppix.img on a different machine, and since the knoppix.img had hardware specific files from the old machine in the image... it was a bit of a problem to update the config. That would have been a good time for the option:

Overwrite/update stored system configuration

to have worked... which led me here. My problem was that X thought I had an nVidia graphics card, when the new machine had an ATI card. I found the file xserver in /etc/sysconfig that said i had an nVidia... so I wound up booting knoppix clean... and copied /etc/sysconfig to a thumbdrive. Then I copied that back from the thimbdrive when I had booted into the knoppix.img... and then did an mkxorgconfig to update. Then X would start!