It is probably appropriate that no one replied to this question. Thinking about it, it's not strictly a Knoppix query, and I should have searched more before I asked. But I have searched since asking, and found some solutions, so I offer my notes below to anyone who has trouble booting FreeDOS in the Knoppix package and ends up looking here.

-The problem I described above tends to be specific to certain types of hardware, it is not universal, so the default balder/MEMDISK configuration probably works for most people. There are many variables; for example, on the same computer balder will load without problems from a burnt DVD Knoppix version, but the same version on a USB stick gives an error.

-SYSLINUX developers were aware of the problem and attempted to address it in recent versions. I tested the latest MEMDISK on a GRUB bootable USB stick and it successfully loaded balder.img once I appended the raw parameter to MEMDISK in the boot menu. There are various parameters available to specify memory access methods, which can avoid the kind of conflicts and crashes described in my post above (see SYSLINUX wiki for more info).

-Replacing MEMDISK on a bootable Knoppix USB stick with the latest version and adding the raw parameter to the dos boot menu yielded a different but still fatal error. Nevertheless I'm sure it can be made to work with a bit of tinkering, based on the results described in the point above.