I have had problems with knoppix not properly recognizing my older i810 video card, it takes fits every time I apt-get upgrade (it is a HD install). But, the fix is to watch what video card it says it is going to use as the startup script goes by, then edit /etc/X11/XF86config-4, there is a section near the end of the script which sets the video card. It will be 'vesa' if that is what X ended up using, change it to whatever the startup script intended to use. Then log out end session only which will restart the X server.
Running from CD you will have to do this each boot (if it works).
Also, I think this is a Knoppix bug (oops...feature) I have not had the problem with kanotix. Try kano, it does seem to be more solid than knoppix.
And you are right about linux and hardware recognition. The problem is that HW mfgrs are not inclined to make linux drivers so all the drivers have to be developed by hackers independent of manufacturer support. Considering that, they have done a fantastic job although there are some areas (webcams & odd stuff like videotape->usb input adapters) where support is almost non-existent.
There are also rumors about microsoft actively discouraging manufacturers from providing linux support but they wouldn't do that would they?
Linux doesn't really help themselves either, the kernel developers have resisted putting in a 'driver socket' so that manufacturers could link in proprietary drivers because the drivers would be closed source and there is also the 'they are not supporting linux, why should linux bend for them' attitude.