That's not good... the chroot is not working because it is saying it either can't find; or I'd venture can't execute the /bin/sh.

I think when you copied it it didn't copy over permissions... did you use cp -pr or just cp when you ran the copy from the image to the new ext2??

I think everything in your new debian is probably owner:group root:root and rw-r-r or something similar..

ETA: if this is the case.. it will be easier to start over and run the cp with -pr as root instead of fixing these permissions by hand.