Just an update in case anyone else is having this problem...I think it has been fixed with Knoppix 3.6 & up.

This solution above work but will end up creating an additional /dev/cdrom each time it boots until there is a big collection of them.

So: Leave /dev/cdrom in the list of old links to remove but re-create it again right away with 'ln -sf /dev/scd0 /dev/cdrom'.

Code:
# Delete obsolete links and files before starting autoconfig 
if ! checkbootparam "nohwsetup"; then 
rm -f /dev/cdrom* /dev/cdwriter* /dev/mouse* /dev/modem* /dev/scanner* \ 
      /etc/sysconfig/i18n /etc/sysconfig/keyboard /etc/sysconfig/knoppix \ 
      2>/dev/null 
ln -sf /dev/scd0 /dev/cdrom
fi