The easieist way to change the configurations for KDE or other GUI's is-

unpack the KNOPPIX cloop file to your hdd as described

boot a knoppix CD in text mode (knoppix 2)

backup /etc/resolv.conf and /etc/X11/XF86Config-4 and replace them with the ones generated by knoppix

mount your hdd partitions

backup /etc/resolv.conf and /etc/X11/XF86Config-4 and replace them with the ones generated by knoppix

chroot into the unpacked source filesystem, mount proc,

mkdir /home/knoppix
cp /etc/skel/.* /home/knoppix
chown -R knoppix:knoppix /home/knoppix
chmod 755 /home/knoppix
su knoppix
vi ~/.xinitrc (create a simple .xinitrc file to start your graphical environment of choice)
startx

make all the changes you want, you are now in the remastered version of Knoppix you're making.

when done,
as root-
rm -rf /etc/skel
mv /home/knoppix /etc/skel
chown -R root:root /etc/skel


Clean up your temporary stuff, clear apt-get's cache, edit scripts and do any final tasks, then exit chroot and remaster the CD.

Doing it this way, you don't have to xnest. but you do have to be aware of whether the shells you're working in are in the knoppix CD you booted or are chrooted to the filesystem you're working on. Some things are easier to do from outside the chroot, most must be done from inside the chroot'ed filesystem.