Fatal: Kernel /boot/vmlinuz-2.6.8.1 is too big
 

I just compiled the vanilla 2.6.8.1 kernel under MDK 10 and I'm getting "Fatal: Kernel /boot/vmlinuz-2.6.8.1 is too big" when trying to update lilo. The Kernel itself is slightly over 4MB (which isn't all that much). What am I doing wrong?

yes it is very much too big.... you chose the wrong file ...
you copied over the uncompressed kernel image
where you should have taken the compressed kernel image ..
which typically with the 2.6.x series kernel is around ~1MB ....
the compressed kernel image is usually located at :

I am not sure exactly from the description, but i would check if you have a seperate partition for /boot and that it does not already have a few kernels in it, as I think the default is about 40MB for that in mdk 10 install. Also check to see that it is not refering to the name in the default= kine, there is a max on the number of characters (it has to match 'label=...' in the kernel section to be the one used).