Somehow the pidof statement is missing the kdm and branching to a xsetroot command with solid background. I am running kdm and upto 7.0 kdmdesktop always ran. I just commented the xsetroot and put in kdmdesktop in the second branch and now I get my nicer background....FYI
This is happening because kdm has been patched to update the PATHs for root and normal users. The patch omits /sbin and /usr/sbin from root's PATH, so Xsetup_0 can't find /sbin/pidof. Changing Xsetup_0 to explicitly reference /sbin/pidof fixes this problem. (Personally, I question the necessity of patching the PATHs in kdm at all. I suspect that it was done as a workaround for the fact that users are not properly logged on when kdm is used. However, this is caused by a change to Xsession, and I believe that it should be addressed there.)
This problem is fixed in xinitrc-3.1-1