Grub will not boot into an ISO file. Have a look at Grub's Fedora kernel setup and you will see that Fedora is not booted from an ISO file. It is certainly possible to boot a system from an ISO image, but Grub is not the tool for that. You can mount an ISO file into your file system, for that you need to have an already running system.
Knoppix has it's own ways of being installed to hard disk. It can even be installed on a Windows partition and launched from there. Knoppix CD's have a so-called cheatsheet with all this kind of information.
Last edited by Tinkster; 10-30-2010 at 04:11 PM.