I do have rights to the Knots folder. I ran the RunKnotsInTerminal.cmd and had VLC started before starting Knots. Here is the output:

C:\Program Files (x86)\Knots>ruby\bin\ruby.exe knots.rb

[2010-06-04 02:40:07] Welcome to Knots - http://wiki.maemo.org/Knots2
[2010-06-04 02:40:07] Starting Knots in C:/Program Files (x86)/Knots with ruby 1
.8.6
[2010-06-04 02:40:07] Setting bigger buffer size, ignore the following two warni
ngs
knots.rb:232: warning: already initialized constant BUFSIZE
knots.rb:233: warning: already initialized constant BUFSIZE
[2010-06-04 02:40:07] Waiting for VLC to start
[2010-06-04 02:40:09] Waiting for VLC to start
[2010-06-04 02:40:11] Waiting for VLC to start
[2010-06-04 02:40:13] Waiting for VLC to start
[2010-06-04 02:40:15] Waiting for VLC to start
[2010-06-04 02:40:17] Waiting for VLC to start
[2010-06-04 02:40:19] Waiting for VLC to start
[2010-06-04 02:40:21] Waiting for VLC to start
[2010-06-04 02:40:23] Waiting for VLC to start
[2010-06-04 02:40:25] Waiting for VLC to start
[2010-06-04 02:40:27] VLC failed to start properly. Knots will not work.
[2010-06-04 02:40:27] You can access the server with http://localhost:1978
[2010-06-04 02:40:27] Press ctrl-c to close the server

I can see 3 instances of vlc.exe *32

I did try Firefox and Safari too, same result.