In order to update the software, you have to install it to the hard drive. If you are running from CD, you can write and change anything on the CD (what you would need to do to update packages).

Apparently, there is an "live-CD" installer in the works that allows you to "install" software while running from CD. See this post:

http://mailman.linuxtag.org/pipermai...er/004252.html

For saving you files and settings, you must create a "persistent" home directory:

http://www.knoppix.net/docs/index.ph...stentHomeHowTo