I have Knoppix 3.2-04-10 installed and it works flawlessly for me. It is very much a standard Debian install (with a few minor differences of course). I wouldn't boot the .iso from hdd because you cannot move directories to their own partitions.

There is one advantage to having the .iso on your hard drive tho, you can easily keep up with Klaus and his very enjoyable habit of putting out an updated release quite frequently. For me though that isn't a priority because what I have works beautifully. My hardware is so old that I don't worry about the latest video/sound drivers, all my stuff works with the old ones. I did upgrade my install from 3.1 to 3.2 mainly to get KDE 3.1.1 and tabbed browsing in Konqueror.

To answer your question about the install taking 2.5G- well that's because there are so many programs included.

Anyway.....that's what works for me.