I have the same issue with my older Dell desktop.

The solution is to give the USB key zipdrive-like geometry (64 heads, 32 sectors per track)
You can do that from the Knoppix CD using the "mkdiskimage" script:
Note: This will erase all data on the USB drive
Code:
mkdiskimage -z /dev/sdx 0
-z means "use zipdisk geometry"
Replace /dev/sdx with your USB drive (use 'fdisk -l' or gparted to find out what your USB drive is called)
The 0 means automatically determine the size of the device.

Also might be required (but wasn't for me) is the -4 option, which means "use partition entry 4 (standard for zipdisks)". This option will cause the Knoppix installer to fail because it tries to install to partition #1 of the USB drive.

More info in the syslinux docs:
<edit>Sorry, not allowed to post links yet. Read /usr/share/doc/syslinux/usbkey.txt from the Knoppix CD</edit>