This could easily be the start to a great campaign. Hints at an greater story than has been revealed thus far, and the genesis of any number of powerful villains who quickly spread out from the scene of the impact to pursue their own plans of conquest or vengeance.
I would definately add additional drawbacks, such as the wearer has the viewpoint of undead, so life is both visible, hunger-inducing, and induces hatred. The wearer would need to have strong willpower to avoid falling into the mind-set of undead. Go to Comment
I had a hollow-bladed 'rambo knife' when I was a kid. It sucked - the hollow made the handle weak and easily broken.
The idea of a knife of storing is not a bad idea, but as moon has said, the presentation needs work.
Spellcheck is needed on this, see "To retrieve soemthing from the space, the user reaches into the space just like a bag of holding, but thier arm is shrunk to fit inside the handle." for two typos in one sentance, not to mention the typo in the summary text.