They're seems to be alot of problems with this, i've tried it and can't get it work, but there is a thread going on about it. (acaully its not exaclty but it should be similar enough to help you.)
http://www.knoppix.net/forum/viewtopic.php?t=11796
How can I install .iso image to the USB memory stick and how to make it bootable for linux?
(At the moment it works fine with windows ME, so booting is is fine,, but how to get linux boot working?)
They're seems to be alot of problems with this, i've tried it and can't get it work, but there is a thread going on about it. (acaully its not exaclty but it should be similar enough to help you.)
http://www.knoppix.net/forum/viewtopic.php?t=11796
Should be pretty easy. syslinux supports this for quite sometime.

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