I just Googled, and found this statement, which seems contrary to your
statement (see a page or more down at
<
http://en.allexperts.com/q/Electrical-Wiring-Home-1734/Old-Knob-Tube.htm>):
"As you noted...K-N-T never had a ground..so you can NOT legally install 3
prong grounding receptacles on this wiring....to do so is a Code
violation...it creates the illusion of a grounded receptacle when there
actually is no ground....so if you are installing new receptacle
outlets...you MUST install only 2 prong non-grounding receptacles (which are
getting harder and harder to come by now-a-days...we had to special order
our last batch ) or gut out the obselete K-n-T and run all new 12/2 with
ground romex in it's place. As far as new switches...these can still be
installed on non-gounding circuits....and there will obviously be no
physical connection to the switch's green ground screw.
(NOTE: certain light fixtures - especially 2' and 4' flourescents fixtures -
may not operate well without a ground in place)
Clearly...to make this mansion electrically safe, functional and up to
date...the K-n-T MUST go...and to replace it all at once can be a rather
expensive undertaking...perhaps you can do it in small sections...a little
at a time. 12/2 w/ground romex can be bought in short 100' and 250' foot
rolls...and this may be the approach you need to take."
I would think if installed a 6' copper ground bar into the soil outside his
house, and use 3-prong outlets where the ground wire is to the copper pole,
that it would pass code.