Why I mentioned it as full remastering is, DSL now offers a convenient way to create your own DSL flavor using DSL extensions. But I prefer full remastering since it gives me more control.

Its mainly through trail and error that I found the steps to significantly change DSL to suit my needs. Of course few links helped me. But nearly at the end of my quest I came across a wonderful book by the creators of DSL, and I think that is the definitive guide you should read if you are interested in remastering.

Negus Live Linux Series The Official Damn Small Linux® Book: The Tiny Adaptable Linux® That Runs on Anything
by Robert Shingledecker; John Andrews; Christopher Negus

Any way here goes the steps , now a mix of my trail & error, from this book and from other links :)

mkdir remaster
cd remaster
mkdir image
mkdir -p source/KNOPPIX
mkdir -p master/KNOPPIX

mount -o loop dsl.iso image
cd image
find . -size -10000k -type f -exec cp -p --parents '{}' ../master/ \;
cd ..
extract_compressed_fs image/KNOPPIX/KNOPPIX > tmp.iso
mount -o loop tmp.iso image
cp -Rp image/* source/KNOPPIX
cp -Rp image/.bash_profile source/KNOPPIX
umount image

Now , if you want to make any changes you can directly edit the files in
source/KNOPPIX or you can chroot . With chroot ,in the current shell root(/) directory becomes the one ontaining the source files. Now execute commands like cp,mv in this shell relative to root(/) and that will
affect the files in source/KNOPPIX. I typically use both methods in remastering.

chroot source/KNOPPIX
mount -t proc /proc proc

In the next post I will explain how to change the Desktop background image, menus, ect.
For the moment , assume that you have now done the required changes and would like to create the remastered ISO.

First unmount the proc file system.

umount /proc
exit

rm -rf source/KNOPPIX/.rr_moved

Now lets create the KNOPPIX image

mkisofs -R -U -V "KNOPPIX.net filesystem" -publisher "KNOPPIX www.knoppix.net" -hide-rr-moved -cache-inodes -no-bak -pad source/KNOPPIX | nice -5 create_compressed_fs - 65536 > master/KNOPPIX/KNOPPIX
cd master

Its time to combine the KNOPPIX image , boot files, ramdisk in to the ISO

mkisofs -pad -l -r -J -v -V "KNOPPIX" -no-emul-boot -boot-load-size 4 -boot-info-table -b boot/isolinux/isolinux.bin -c boot/isolinux/boot.cat -hide-rr-moved -o SahanaDSL.iso .

http://www.eng.uwaterloo.ca/twiki/bin/view/Linux/RemasteringGuide
http://www.linuxforums.org/desktop/remastering_dsl:_a_short_howto_with_a_long_preamble.html