I have DSL-N up and running in VM now.
Had to search the DSL-N forum for some hints in order to get it working (see http://www.damnsmalllinux.org/dsl-n/f/viewtopic.php?t=416) however.

Question: Is it possible to have the VMware Tools installed?

What type of HD have you defined in VM.

My experience was that you should not choose for the standard settings, but the custom one. Then make sure you have a EDI harddisk and not the standards SCSI one.

Where does the installation go wrong, maybe I can help.

If you have /dev/sda you are using the standard disk setup (SCSI disk). If you go for the custom setup you can (after some screens) indicate what type of hard disk you want. If you choose EDI you get the hda disk.

After partitioning the hda disk you can install to /dev/hda and then it worked for me. So yes, I installed on /dev/hda.

Hope this answers your question.

Do I understand correctly that you are trying to install from CD?
Did you burn the CD yourself from ISO?
I know there are various tools to check whether the burn went OK, but personally I don't burn CD's but use the ISO file directly (you can "mount" this when you double click the CD in the VM server). After installation I "unmount" the ISO file and set the CD back to using the actual CD player.

Hope this is clear. If not, please ask again.

Sorry, I am also quite new on this matter.
I can not help you further.
I think the best I can suggest for now is - if possible - make a screenprint of the error or write the exact text down.
Then start a new thread in which you explain your problem.

Once again, sorry that I can not be of further assistance