I also have this error. I tried Knoppix 3.3 on a machine at work, and got this error. A week later, I tried to install KnoppMyth on a computer at home and got the same error. I don't know what version Knoppix KnoppMyth is based on, but the only similarity I found between the two installs was both computers are Dells. One a Dimension 4400 & the other a Precision 450.

I did some research:
http://www.knoppix-std.org/faq.html
and found this:
I get the error “Can't find Knoppix filesystem.” then it drops me to a “limited shell”. What the hell?
This means you are not using a SCSI or IDE CDROM drive. After Syslinux starts up the first thing Knoppix wants to do is find and uncompress the filesystem (that big KNOPPIX file on the CD). Knoppix only probes for the CD on all SCSI and IDE buses. If it can't find it you'll get the error above.

For Transmeta laptops and some Sonys with PCMCIA cd drives try:

knoppix ide2=0x180 nopcmcia
Now I'm a bit confused, because both of my machines have the standard CDROM on the IDE bus. So, I don't get it. Maybe a problem with dells?

Hope that helps.