Welcome to LQ!
The problem with what musicman_ace said is basically the same problem you had when you installed Knoppix.
When the other computer has this drive mounted using the IDE to USB adapter, Linux sees it as /dev/sdx, but when you put it back into your laptop it is going to be /dev/hda. So LiLO will NOT boot it, because the master boot record and / filesystem will not be on /dev/hda. That is why "the bootloader (LiLO) showed up, but then it failed while trying to load the kernel."
If you can get Win98 on it, with a FAT filesystem, then you could install Amigo Linux
or perhaps ZipSlack. I have never done these, but it's doable.
The only other option is to install on another computer, but you'll have to have the bootloader and / filesystem correct for the lappy when you put it back in there. Using another lappy where you can plug the hard drive in directly, and install with a CD, will work. You could install in another computer and put it in the lappy, but you'd have to be able to boot the lappy with something and then rewrite LiLO on that drive.