I don't have twisties worth crap where I am, but here goes... Think of it as your body wrapping around the bike not actually coming off the seat. The purpose of knee dragging is to move the center of gravity and decrease the lean angle at any speed. In other words, say you take a turn at 70 mph, if you knee-drag, your angle will be less. Smaller angle = more grip. More grip = faster cornering.
Start out with the bike on its stand in your garage. Move off the seat so that your non-dragging leg is gripping the bike. You should be able to do this without touching the handle bars and without falling off. Remember that you are pivoting, so your ass should move forward as well as to the side, not just to the side. Shift your weight around and try to feel the balance.
On the road, you want to set your position before you enter a curve. Before or after braking, I really can't tell you. Anyway, move to the side and be sure to shift your weight forward as well. Keeping weight up front not only helps the busa dig into corners, it will also let you change your direction much, much faster. One leg will grip, holding you on the bike. I can't really 'tell' you more as this is a 'hands-on' type of thing.
As far as speed, second should be your gear of choice. Only on very tight, slower stuff, would I use first, although you won't be dragging on those anyway and downshifting can give you powerslides, which can be un-nerving if you have never done one. For the most part, I would get used to familiar corners in the straight position and maximize your speed and then start dragging. This will let you compare your speeds and available traction. You should be able to go much faster with a knee out on the same corners. If not, try to see if you're doing something wrong in your position.
One last tip, try to relax (both your muscles and your mind). If you tense your muscles you will find cornering much more difficult. You should find yourself literally diving into corners... and that will get quite addictive.
I have lost my old links, but someone had written a very nice and detailed article on knee-dragging techniques (a magazine wrote it, I believe). If anyone remembers and has that link, please post it.