For example I guess you use XDM as login manager instead of KDM. The default desktop session is also set to the X-window manager. Which provides the 'ugly' x-term you describe.
It's been a long time since I've seen the XDM login screen (and I can't boot a linux box to check it at the moment), but I guess you should have somewhere in that screen a drop down box (or something else) where you can specify the session you want to use. If you choose what you want there (for example KDE-4.2.2) and then login, you will get the KDE desktop.
Could you also look into the file '/etc/conf.d/xdm' there should be a line
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DISPLAYMANAGER=
It would be usefull to know what is filled in there.
To read the file from the terminal/xterm you have at the moment you can use the command
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cat /etc/conf.d/xdm
Or to just view the line containing 'Displaymanager'
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cat /etc/conf.d/xdm |grep 'DISPLAYMANAGER'
Hope this helps

