If you do a hdinstall then you end up with a normal Debian config.

The terminal server in the Knoppix CD version is a script with some assumptions of your configuration that are not valid when you run it from harddisk.

One solution is to copy the BIG Knoppix file from the CD to the Windows C:\ directory (if you still have that) in the directory knoppix so the image will be in:
C:\knoppix\knoppix

If you boot from floppy (without the CD) then the image will be found and will be used as if it was the CD. Now start terminal server.

After this boot the diskless client and all will run OK, it is a lot quicker this way. I think this is the best solution for classroom project where more than 5 PC's work diskless.

Good luck and thanks to Dave Bechtel that gave the usefull hints.