I have just created a bootable 7.2.0 USB stick in the way described. There is a small change in Knoppix defaults: When asked about persistent storage, Knoppix now repartitions the drive, creates a Reiserfs partition the size of the selected storage, and creates the loop-image there.

Usually, the loop-image (knoppix-data.img) is created in the KNOPPIX directory, now there is created a file there, knoppix-data.inf, that points to the persistent store.

But if this file is deleted (as I did), Knoppix will ask about creation of persistent image on booting, and in that case create it in the KNOPPIX directory - which I BTW tag with release and remastering, so the directory with the basic version of 7.2.0 I just call KNOPPIX720.

It may also be handy to do basic updates and program installs in the virtual machine - plus tweaks like setting the screensaver to blank screen (may otherwise draw a LOT of resources), disable wobbly windows etc.

I haven't used the USB stick for this, rather I have copied the KNOPPIX directory to an otherwise unused HD partition, and created a GRUB entry for it. Then booted it up with the simple qemu command
Code:
sudo qemu -machine accel=kvm  -hda /dev/sda  -m 1024 &
Here, the -hda /dev/sda parameter tells Qemu to boot from the main harddisk. Note that the new KNOPPIX should NOT be placed on the partition you already run Knoppix from when it is to be run under Qemu, at least unless you place the persistent image on another partition.