You are having a simple problem.... all the drivers the kernel needs to access a USB Storage device are not compiled into the kernel. Whatever drivers are needed (including the USB Storage driver) are configurged in the Knoppix kernel to be modules. SOooooo, you have a situation in which the bootloader gets the kernel loaded in (using its code and the BIOS) and then the kernel attempts to access the device, but does not have the code in memory to access the drive (and the modules it needs are sitting on that drive).

I can't give you all the details, but you have one of 2 choices:

1) reconfig and recompile the kernel with the config on all drivers necessary for USB Storage devices set to "Y" (not "M").

2) setup a boot floppy (maybe not possible on your system???) that loads a kernel and an initrd image containing the necessary drivers which then attaches the USB drive and mounts the partitions and moves the system root there... (given your lack of floppy drive, this could theoretically also be done on an extremely small partition of your main hardrive that is then used to boot into the USB drive...)

Hope that helps...