Works using the loopback images (as Fabian said).

Proof of concept:
/dev/hdb4 is formatted as FAT32. A directory was created on it named "knoppix". /KNOPPIX/KNOPPIX and /KNOPPIX/KNOPPIX2 (the two loopback images) were copied from the DVD to the /knoppix dir on hdb4 (and they both fit!), along with /boot/isolinux/linux and /boot/isolinux/minirt.gz (the kernel and the miniroot), the background.jpg, and the html files.

A persistent home, "knoppix.img", was created while running from the DVD, and stored at the root level of hdb4.

The GRUB stanza that loads this whole thing is:
Code:
title Knoppix 4.0 DVD PMI
root (hd1,3)
kernel /knoppix/linux fromhd=/dev/hdb4 knoppix_dir=knoppix knoppix_name=KNOPPIX ramdisk_size=100000 init=/etc/init lang=us keyboard=us vga=791 home=/mnt/hdb4/knoppix.img
initrd /knoppix/minirt.gz
boot
Knoppix successfully loads both loopback images.

Note that if one tries to load the persistent home with "dev" instead of "mnt", it doesn't work.

It would be nice to have a cheatcode that bypassed the "do you really want to use a persistent home" dialog.