From kernel versions 1.1.80 on, the compressed kernel image, which is what LILO needs to find, is in arch/i386/boot/zImage, or arch/i386/boot/bzImage when it is built, and is normally stored in the /boot/ directory. The /etc/lilo.conf file should refer to the vmlinuz symbolic link, not the actual kernel image.
This was changed to make it easier to build kernel versions for several different processors from one source tree.