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Does it work when it's booted from CD, without the encapsulation of the ISO format? Another option is to create a partition 1 you can then do your Knoppix "install" on - just use the flash-install...

Yes, it can done with (for instance)
knoppix tohd=/dev/sda1the first time, and thereafter using
knoppix fromhd=/dev/sda1 if you don't mind the initial boot from CD.

Cheers!
Krishna ;)

Have you tried it on a USB-flash drive? I got an 8GB super-fast, super-tiny Verbatim drive on Amazon for <$30, delivered. The speed is acceptable and I have plenty of room for the persistent file...