USB booting :: 4 GB USB stick and FAT16/32

You can also do a native USB install to a FAT32 partition, but you need to manually format the stick as a FAT32 partition and copy the files from the livecd (make sure that KNOPPIX and KNOPPIX\KNOPPIX are UPPERCASE letters). Then download a copy of syslinux version 3.11 and use it to make a FAT32 syslinux bootloader for your stick. You can do this either from linux or from MS Windows, just make sure to download the correct OS type from the syslinux site.

original here.