Well, I've tried running both Knoppix and Kanotix with the free VMware Player and have prepared a configuration that seems to work well enough. I'm not sure about any VMware EULA problems, but I'm guessing that running your own configuration doesn't pose much of a problem, and as for distribution, one should not distribute stuff that is normally only included with commercial VMware software (example: the Windows Virtual device drivers from VMware Tools needed to usefully virtualize Windows).

The setup below was created using only the free VMware Player (runs under both Windows and Linux) and qemu-img (from Qemu 0.7.X).
I've tried to include all the options I found while searching the net for info in the .vmx file, so this may be an interesting read. Then again...
Also included is a simple shell script that will install the VMware Player under Knoppix or Kanotix, even in live mode, automatically (with default options). Note that you will have automatically accepted the VMware EULA if you use it! (See EULA_AGREED=yes argument used in the script)

Here are the links:
http://www.hgz.com/knoppix/Virtual_Kanotix.txt and
http://www.hgz.com/knoppix/KANOTIX-2...4-VMPlayer.zip

(Warning: Your Mileage May Vary [tm] )

[edit] P.S. This technique may be used to virtually run Knoppix or Kanotix and have K3b burn a physical copy of the running ISO on an attached CD burner, configured as a secondary physical CD-ROM device in the .vmx configfile, directly from Windows. Amazing, but true!
http://www.hgz.com/knoppix/Virtual_Kanotix_Burning.png
http://www.hgz.com/knoppix/Kanotix_Squared.png