As near as I can tell this in-game menu would require its own assets, right? That means that for new graphics options (ie, whatever brilliant beautiful thing valathil does next. Side note: Shadows+Lightrays? Awesome.) to be used in game, say on a nightly test build, you'd still need to use the launcher/a custom command line. As such, I'd think that an ingame menu should be used as a tweaking thing (like flaser was talking) rather than as the sole general end-user settings point of contact - that's only really a good idea if you're dealing with a finished game and a fixed feature set.
Now that being said, I would LOVE the ability to custom-tweak all those little lighting display tags and see real-time (or even set, hit apply, screen refreshes, set again, etc.) changes in the effect they have, instead of having to close out, tweak the command line/launcher settings, relaunch, etc, until by the time I'm through pilot selection and so on, I've half forgotten what the old settings looked like and I can't compare 'em effectively.
Pie-in-the-sky dreaming here, but would it be possible to have the settings window have, either in a 1/4-sized preview panel or as a togglable screen, a nice big battle with lots of flak and beams and stuff flying all around so as to make sure that A: everything looks nice and pretty and B: the framerate's good.