Which distribution are you using? However it works in your distro, you need to install the bzip2 package. You didn't list your distribution in your control panel, so we can only guess.
If you are using Debian, you should do apt-get install bzip2. Do a search on LQ for kernel compile, and you will find some How-To's that will point you in the right direction. You may also go to the Distribution Forum and do that search under the forum for your distribution.