Is the blob at the bottom of the "enclosure" a cord connector?
That blob is a legitimate fitting for the wiring method used (flexible metallic conduit). I believe it is called a monkeyface.
This is what you would use when you had to transition from flex to K&T.
Two options here:
1) Rip it all out and start over
2) Run away screaming
That all depends. If the homeowner goes ballistic at hearing the possibility of plaster being removed, you run away screaming. If they are game, you help them. That is what we are in business for.
Note the porcelain tubes projecting from the left hand wall of the box. These are no doubt why the previous installer decided to leave the original enclosure intact. Judging from the appearance of the GE equipment, this was probably done in the '60s or early '70s, before the health hazards of asbestos were well-known to the public. The installer was probably more concerned about disturbing the insulation on the K&T circuits, certainly a dicey thing if you were going to cram a factory NEMA 1 enclosure in there. But if you were to open the chases on each side of the panel, remember that it remains perfectly legal to conceal soldered and taped splices on existing K&T. A better option, of course, would be to rewire all of the K&T circuits. A talk with the AHJ would be in order before proceeding.
Fortunately, this call is more and more made easier by the fact that home inspectors recognize and note K&T when they see it, and insurance companies frequently will not issue new policies where the house is known to have K&T. These facts tend to give us more leverage with homeowners than in the past.
[This message has been edited by yaktx (edited 02-15-2007).]