That particular screen is telling you to turn on the iMac's Magic Mouse. Since you aren't using one, I am not sure why it is being displayed.
Do you, by chance, have access to the Apple Diagnostics Disk for your system? If so, running it may help islate the problem.
Will the system boot to the OS X install you have on the HDD now if you let it run?
Have you tried a different mouse or a different USB port?