There is a good description of the boot sequence here:
Read the posting from Javascout on Feb. 17
When the kernel in flash in loaded, it mounts /dev/hda1 as "/"
It then runs the init scripts listed in /etc/rc2.d which can be found in /etc/init.d
One of those scripts checks to see which kernel is running, and if it's the flash kernel, the script it starts the process of loading in the new kernel from /boot
So if the root file system ("/") is not in /dev/hda1, where the flash kernel expects to find it, you've got problems.
The bottom line is that "/" MUST be in /dev/hda1