I have tried with an 8GB fat32 partition (let me state here again that the drive in question is a verbatim tuff 'n' tiny 8GB thumb drive) and that failed with that message.
Yes, that was my first step. Since the problem seems to be with the new flash-knoppix2 and likely some combination of my hardware/flash drive, where is the best place to report the issue? Is there a bugzilla for Knoppix?