Okay, I did some fooling around with different configurations for grub4dos, and conclude that the problem for tux not working is that I am not setting up the menu.lst options properly.
I altered my bios to give my hard-disk boot priority over my usb-drives to do some experimenting.
Next I added the following code to my (sda1) grub4dos menu.lst file:
title SilTaz 4.0 RC3 - on 1GB USB
uuid bf51365a-086e-4401-aa5b-88d2762d5f23
kernel /boot/bzImage rw root=/dev/null home=uuid bf51365a-086e-4401-aa5b-88d2762d5f23 lang=en kmap=en
initrd /boot/rootfs.gz
With that option, grub4dos booted slitaz on my USB but it would only allow me to login as root and not "tux"...the same problem with the frugal install on my hard-drive.
Then I used the following option in the grub4dos menu.lst :
title SilTaz 4.0 RC3 - on 1GB USB
uuid bf51365a-086e-4401-aa5b-88d2762d5f23
chainloader +1
This just passes on the bootloading duties to extlinux and my was able to boot as root and tux, as it should.
I assume I have set the wrong parameters for "home" in the first configuration, but haven't figured out the correct setting. Until then, I can take the easy way out by doing a usb-reinstall to my hard-drive and use the "chainloader +1" option.