1) YES. It is possible to modify what progams that are on the live cd.
Look up remastering in the docs here on this site.
Its a bit of work.

Why not just create a home folder for knoppix and install those extra programs there?

2)
I cant tell what the essential packages are as that depends on what programs you need.
But you can remaster a 3.6 and just remove the office packages and there should be room for your programs.

Tips:
Since remastering needs a free partition, I suggest you download Virtual PC trial from MS and use its virtual hd for the remastering.