Well I did a nice clean install of OS3.1 on the new hard drive, installed the Deneb software, installed LHA, installed MUI and ran the USB stack. Everything works great.
I tested the memory stick and it came straight up and then I tested the USB drive again, but this time it mounted with the correct file system and my good old AmigaOS3.9 icon and Emergency-boot icon appeared on the screen.
Now I just need some Kickstart 3.1 ROMS and I can try to install OS3.9 off the USB DVD+R drive.