also extract the vmlinuz and initrd.gz files and put them in the KNOPPIX directory (entire directory and files in uppercase).

isolinux.cfg entry:
LABEL knoppix
kernel /KNOPPIX/VMLINUZ
append ramdisk_size=100000 init=/etc/init lang=us apm=power-off hda=scsi hdb=scsi hdc=scsi hdd=scsi hde=scsi hdf=scsi hdg=scsi hdh=scsi vga=791 initrd=/KNOPPIX/MINIROOT.GZ nomce quiet BOOT_IMAGE=KNOPPIX


you can also try to download my image:
http://www.darklogic.org/fdos/beta9/minicd/knopcd.zip

and add the large KNOPPIX file yourself. then recompile the ISO.
On Windows2000 I do this using the makeiso.bat batchfile.