I am new to this forum so I would first like to say Hello to all. I realize that the request on this thread is for v7.4.0 while I am using v7.4.1, but I could find nothing in the version information that changed this issue. This post is meant (primarily) for Werner Schultz and "rudepeople". I will enumerate below:

I have successfully installed Knoppix 7.4.1 to an 8GB SDHC MicroDrive using a USB adapter several times now (effectively the same as a USB "thumb drive", "pen drive" or whatever one wants to call the device).

1) The Flash Card used was pre-formated (from the manufacturer) as FAT32. I used it the first time in its "out of the box" state with success and then while experimenting with installations, I manually removed the partition and reformatted using the freeware version of "MiniTool Partition Wizard Home Edition v8.1.1". USB installs have been successful using the same drive several times now.

2) To Werner, I have been using the install from "Start Menu => Knoppix => Install KNOPPIX to flash disk" I choose "r Allow installation only on removable devices" and use the overlay File option and NOT the Partition option just as you wish to do. When prompted at the end of the USB install for the size of the file, I move the slider to size it at 1024MB. This seems to create the Image file found at "/home/knoppix/Desktop/KNOPPIX/KNOPPIX/knoppix-data.img". It is sized appropriately at 1GB and Persistence works fine. This is probably too big (1GB), but I don't know what a reasonable size for it is yet. It seems that in another thread you may have addressed this so maybe you have some advice or observations for me?

3) To "rudepeople". As mentioned, the drive has been used successfully "out of the box" with subsequent repartitioning and reformatting done using "MiniTool". This install uses approx 4.5 GB (including the 1GB Image file) leaving approximately 3.5 GB of the FAT32 partition unused. I have copied 3+ GB of .jpg files (along with other files) to the drive, moved them, deleted them, copied them to other folders (while staying within the 3.5 GB space available) in order to test that the drive has been written to beyond the "end" of the drive as seen by the drives internal "usage smoothing" algorithm. I have created folders, copied, deleted, etc. in Win7 Ultimate x64 as well as within Knoppix itself. I can move the USB drive to another computer, boot it to Knoppix, and use the files as I wish. Like you, I intend to use the drive to carry additional tools with me as well. It seems to work fine.

Caveats and Observations:
1) In one install, I decided to use MiniTool to resize the remainder of the FAT32 partition and create another partition in the unused space created just to see what would happen. MiniTool let me shrink the FAT32 to within 1GB of the unused 3.5GB space which would allow me to create a second, separate partition of approximately 2.5GB. AT THAT POINT, before creating another partition in the now unused space, I remembered that Windows was only going to see the first partition of a USB drive anyhow, so I resized it back to the original full capacity. It ruined the ability of the drive to boot. Whatever it did, the drive was no longer able to boot Knoppix. I won't do that again.

I hope this helps and any and all advice or observations are welcome. Best of luck.

Mike