Assuming all said till now is a winning strategy I really believe the problem here is the starting focus.
I have the impressions many are trying to "simply" fit a whole Linux distro inside the virtual appliance with some nifty application on top.
I'm not sure this is enough to win $100,000 (and sincerely I hope not).
Coming from the IT security planet an appliance is an extreme tailored OS around a hardware set, doing nothing but the task advertised.
This approach leads to a very small, very fast, very simple-to-manage (well, apart Cisco stuffs) boxes companies not having money to invest in know-how are happy to buy.
I think this approach should be applied in a virtual appliance too, considering average RAM available in an average desktop computer and average media vectors (IMHO thinking the Virtual Appliance will move around by CDRom is not a positive starting point).
So, at the end of the day, I'm wondering how space could take a Linux kernel without anything but 1 or 2 packages (let's say even 10 of them) to provide the feature you're looking for. More than 192MB?
(just consider Damn Small Linux is desktop distribution working in 50mb space).
BTW: you may find interesting VMware Challenge suggestions:
http://www.virtualization.info/2006/03/vmware-challenge-suggestions.html
HTH
Alessandro Perilli, CISSP, MVP
http://www.alessandroperilli.com
Blogging about IT Security on http://www.securityzero.com
Blogging about Virtualization on http://www.virtualization.info