I am having the same problem trying to create a usb stick containing Karmic using usb-creator 0.2.7.
I am using the same Sandisk Cruzer Micro 8 GB device as the original poster. They are widely available here in the U.S. U3 has been turned off. I sucessfully used this very same usb stick before with an older version of usb-creator, but I believe I had to format it myself before I could boot from it--I couldn't use the FAT partition preformatted on the device to boot from. Now reformatting doesn't solve the problem. It is being formatted with a geometry of 62 sectors/track, 248 heads/cylinder, 1019 cylinders, which seems like an odd geometry to me.
From testing so far it appears that the error message is coming from the ldsyslinix boot record in the first sector of the partition which is trying to load the rest of ldsyslinux from a file in the FAT partition. So far I believe the signature test is failing, meaning that the wrong sector is being loaded. On my system it appears the mbr at the first sector of the device is not being read and executed by the BIOS, which itself finds the boot partition as basic partition 1 and loads the boot sector from the first sector of that partition. I don't know whether or not the BIOS points the SI register at the partition entry before transferring control. It seems that the extended BIOS calls are being used in the boot sector (logical sector number rather than CHS addressing).
I have a Toshiba L355D-S7825 laptop with an Insyde BIOS, version 1.70.