I don't think it is a CPU lockup problem - unless by hitting a key locks it up.
Booted in "normal" mode by pressing enter at the boot prompt gets the expected X running and KDE.
Before and after key presses the clock is still running.

I've not tried a Knoppix 4, I've been trying KNOPPIX_V5.0.1CD-2006-06-01-EN.iso.
What's the difference? Earlier kernel?

You don't think it has anything to do with "No PS/2 Controller found."?

JS.