Greetings again, vkrishn

It's not clear to me what your needs might be, but there are two
additional means of modification built into Knoppix, other than
additional cloop overlays. Somewhat 'hidden' in the Knoppix-cheatcodes
text are the following ideas. Perhaps one of these might be of some
use to you.
Excerpts from knoppix-cheatcodes.txt

If you place an update*.zip or update*tar.gz file on the medium holding
the KNOPPIX data, it will be unpacked onto the overlayed filesystem
before starting "init", thus allowing quick reconfiguration of the
system.

The file "knoppix.sh", if residing in the main KNOPPIX directory, will
be execuded after autoconfiguration and before starting the graphical
desktop. It can be used in order to start additional services.