This is a standard way for me: create a VM (Virtual PC, Virtual Server, Windows XP Mode, Hyper-V), attach an ISO file with desired OS, install OS, attach an ISO file with SQL developer edition, install SQL.
Used it for SQL 2000, 2005, 2008 – now started with 2008 R2: downloaded an ISO file from MSDN subscriptions and used it as described above.
First problems came during the setup: suddenly the setup program reported something like that:
“Could not find module to install”
Setup was interrupted, I tried it over and over again – pretty same result. Bad ISO? Downloaded it again – same result. Somehow I succeeded to continue setup SQL server (using Repair, then add new features to existing instance), but then came another error message I cannot get rid of
“Could not find the Database Engine startup handle”
Fully confused, I burned the ISO file to DVD, mounted it to VM and installed SQL 2008 R2 without problems.
Another VM is running in Hyper-V on a server outside of manual accessibility, so I cannot just put a DVD into the DVD drive and do the same. Here helped WinRAR: extracted all the files in a temporary folder on VM (be sure using a short named path – former SQL installations were not tolerant to LFNs/blanks in path name etc.) and started the setup as usual – succeeded!
Summary: the solution is – either try to burn the image to a DVD and use the physical drive or extract the files using WinRAR and start the setup from filesystem.
Just mounting an ISO file as a virtual DVD is not suitable for SQL 2008 R2 developer edition – this is my experience. Since the setup of SQL 2008 R2 is not a-couple-of-minutes-business, this solution may save you a big portion of your time (despite of nerves).
UPD: Similar problems are described here: