The kernel that comes with the LiveDVD does not recognize FAT USB drives, so it cannot mount /mnt/sda1. After many hours experimenting I found that if I partitioned and formatted a USB drive with Ubuntu Linux (fdisk /dev/sdb and create a Linux partition, then mkfs.ext3 -I 128 /dev/sdb1 and then mount /dev/sdb1 /mnt/sdb1 and then copied DISC.BIN to /mnt/sdb1) it would at least boot to the X-Windows before locking up (I don't have DHCP so maybe is the cause of lockup). I had to put the VMLINUX.GZ and INITRD.GZ on my 64MB memory card and point to them in kernelloader configuration. I already spent a lot of time messing with this and don't have any more right now, but maybe this will help get you started. I don't know why the kernel VMLINUX.GZ on the LiveDVD disk does not support msdos or vfat filesystem types, and don't know how to add support in.
EDIT - "-I 128" is important as 256 Inode size was not supported.
PS2 v9 NTSC, PS2 v12 NTSC, PS2 v15 VESA