Sure you can do this. Just create custom Linux VM (menu New, Custom, Do not add disk, More options and choose ISO for CD) and point it to your live CD.
Alternatively you can change configuration for existed VM and point its CD/DVD to your ISO.
i tried this with kubuntu i386.iso and get an error "Could not load RSDP" or something to that effect, this brings up the Kubuntu boot screen - but hitting "enter" causes error.
I have a macbook intel duo core 2 - - i'm wondering if PowerBook is the iso i need instead of i386.