I'm not sure if this is possible but I believe you could try extracting the iso image into seperate directories on a partition, then booting with the kernel out of that directory... but then again I'm not sure if you can specify a directory out of a partition for the root (/) of the boot.
As in, you could extract knoppix to /somepartition/knoppix then create a lilo boot like so:
image = /somepartition/knoppix/kernel
initrd = /somepartition/knoppix/initrd.gz
root = /somepartition/knoppix #part i'm not sure about
label = knoppix
append="whatever you put in here on your system"
As I said, I'm not sure if you can specify a directory instead of a device (ie. /dev/hdb1) as 'root'.
Of course, you will need to specify the correct 'image' and 'initrd' (if it has an initrd).
I know this works with feather-linux off my flash stick (I copied the kernel and initrd off it) by using the following:
image = /boot/linux24
initrd = /boot/minirt24.gz
root = /dev/sda1
label = Feather-Flash
append="ramdisk_size=100000 init=/etc/init lang=us apm=power-off vga=791 nomce quiet BOOT_IMAGE=knoppix"
/dev/sda1 = first partition on my flash stick.
Good luck, let me know what else you figure out.