I agree this should be simpler, but I did get Posmanet's procedure to work for me. I used this to compile some wifi modules and also the nvidia module. I did it slightly differently but it amounted to the same thing. I made the /usr/src/linux link point to the /usr/src/linux-source-2.6.17 folder and copied the contents of the existing /usr/src/linux-2.6.17 folder into linux-source-2.6.17, using Konqueror, overwriting all, instead of the other way around (less to copy). It works either way. Then I did the "make menuconfig" and exit, with errors, in /usr/src/linux-source-2.6.17 (=/usr/src/linux because I changed the linux link). I didn't do the following "make". Then I compiled several modules using module-assistant, for example to compile the nvidia module I just did a "m-a -k linux a-b nvidia-kernel", it downloaded what was necessary and left an installable deb package in /usr/src. I could have had it install the package as well, using "m-a -k linux a-i nvidia-kernel". I specified the kernel folder for module-assistant (m-a) to use explicitly with the -k option to avoid any problems with it trying to use the Knoppix headers. So here's what I did step by step, if it helps anyone:

su
apt-get update #make sure you're not in a package handler like synaptic or kpackage when you use apt
apt-get install linux-source-2.6.17 #This brought in version 2.6.17-8
exit
cd /usr/src
tar xjvf linux-source-2.6.17.tar.bz2
alias cp=cp #this removes prompting for overwrites, if doing the copying on the command line
cp -r linux-2.6.17/* linux-source-2.6.17/ #can also do this in a file manager
ln -s linux-source-2.6.17 linux
cd linux
make menuconfig #just exit and save the .config
cd ..

su
apt-get install module-assistant
m-a -k linux a-i nvidia-kernel #compiles an nvidia-kernel module, installs it and leaves the deb in /usr/src
m-a -k linux a-b madwifi #compiles an upgraded madwifi module
m-a -k linux a-b acx100 #compiles an acx100 wifi module (also need firmware)
etc.

Make sure your version of gcc matches the one used for the Knoppix 5.01 kernel. I had upgraded to gcc 4.1 and was getting "invalid module format" errors when loading the modules. I downgraded back to gcc 4.0.3-4 from http://snapshot.debian.net/archive/2006/06/22/debian/ testing main repository and recompiled, then it worked. I downgraded g++ to the same version.

For nvidia to work, you also need two other packages:

apt-get install nvidia-kernel-common
apt-get install nvidia-glx

P.S. I upgraded the madwifi module because the version included with 5.01 didn't work well with my Netgear WPN511 adapter, slow connection with a lot of packet loss. An upgraded version from Debian/Unstable works well.