How did you find out that your USB HDD could not be booted?

Did you create a primary partition and mark it as bootable in the partition table?

Did you install grub4dos or syslinux?

If the BIOS does not like booting a FAT32 partition you could create a small (less than 2 GB) partition with FAT16 and use it as a boot partition.

The Knoppix CD does not depend on the presence of an internal HDD. All you need is a CD-ROM drive. After booting the external HDD should be found by Knoppix and be usable. If you decide to install Knoppix to a hard disk drive you have to create a partition formatted to reiserfs unless you want an install with persistent image. You will also need a swap partition greater than 1 GB.

I hope this helps.