If you want to use USB devices with VMWare Server on Ubuntu 7.10 you need to do the following:
sudo mount -t usbfs usbfs /proc/bus/usb/
Start VMware, and load your virtual machine.
Select the USB device in VM -> Removable Devices -> USB
Note that if you want usbfs to be mounted at boot, you'll want to add this line to /etc/fstab:
usbfs /proc/bus/usb usbfs defaults 0 0
I put it directly under the proc entry.