TDot did a great work with his "HowTo boot Deam Small Linux from a USB fob" . His page is here:
http://fuzzymunchkin.dyndns.org/tdot/usbkeyfob/
I did a translation of the first section into German, which you can find here:
http://www.spyhome.de/usbknoppix.html

I wasn't able to boot the new Knoppix 3.8.1 this way!! Maybe someone as an idea.
I think it has something to do with the initrd.gz and the new way usb modules are loaded, because syslinux starts up, loads the kernel and the initrd file and then quits with a kernel panic.

Greadings
Christian