I have this same issue with VMWare Workstation. Bummer that each release of Vista (RC1, RC2) has had a different issue with VMware. You would have thought MS would have tested Vista with one of the biggest Development tools before releasing.
This has been covered a few times on the forums and there are workarounds posted. Please use the forum search function and you will find the answer
Actually just found it here:
Didn't realize this was the same issue I had when I tried to install RC2.
I haven't had great success with the forums search, and since I seem to see responses from several people that say try using the search it sounds like I am not alone.
Burning a real DVD of the image seems to resolve this issue.
Anyone from VMware care to comment on whether this issue is image-related, or a problem with the VMware products?
I would mount the iso into the filesystem (i.e. /mnt/vista) and then use the VMware Server client to point to the mount point (i.e. /mnt/vista) for your CD/DVD drive. That should get you around the issue.
For those using Windows as the Host OS, I would recommend using Daemon Tools (http://www.daemon-tools.cc).