Thanks for the replies - but I have tried the disk in my own wii and it works fine, and I've also tried a WBFS formatted USB stick that works fine in mine, and it comes up with the same error message. So I'm pretty sure I've ruled out the disk or stick being the problem.
And yup, did the summer thing and verified all the wads just fine.
One thing that's just clanged a bell in my head is, does the channel for USB loader still need the USB app in the SD:/apps/ folder to work?
When it didn't work first time, I played about with various apps on the SD card and it's possible I took it out.