OK, first post so be gentle with me.
I had a go at this with xdsl and vmplayer, basically I did a loopback install and created a 2Gb file system.
Downloaded the kernel, appplied xbox patch and knoppix patch and compiled, installed and rebooted (there is much more to this than that simple explanation, involved a tussle with versions of gcc and gun utils). Ended up with a bootable system that moaned about a few missing modules, although I suspect I needed to recreate the initial ram disk (initrd).
Anyway, thought it was good enough to try vmplayer and it ran (after long install process), but errored about "not enough physical ram" when trying to run the downloaded browser app. Tried assorted settings but no joy - put it down to my bodged kernel compile.
So thought I'd try a more techie linux distribution and have xebian installed as a 2Gb install on my E drive.
Basically been through the same hoops (downloaded the kernel, appplied xbox patch, compiled, installed and rebooted) still think I need to rebuild my initrd but seems ok. To cut a long story short again tried vmplayer and still error message about physical ram. done some reading but still no luck, looks like vmplayer needs loads of RAM and the 64Mb of my xbox just isn't enough.
Will keep trying and let you know how I get on.
tah
burgin