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Strange Errors Creating a VM

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I'm getting some odd behavior when trying to create a VM.  This started on a W2K12 box but I decided to upgrade it to R2 on the off chance that the problems I am seeing were being caused by something wrong in the OS.  The problems persisted.

I am just trying to create a VM.  Initially, I created it with the standard dynamically sizing 126G drive but I changed that to a fixed size 126G drive when I couldn't load an OS.  I am getting 2 basic errors:

1) After booting to the OS CD (2K8R2), I tell it to install and it errors with "Windows installation encountered an unexpected error.  Verify that the installation sources are accessible, and restart the Installation".  I tried copying the ISO file to a couple of different locations on the off chance that I had a disk issue.  No dice.

2) If I persist, it will get past the above error and it will present me with a list of OS editions to choose from.  After choosing, it asks what partition I want it installed on.  I select the 126G partition (the only one).  It chews on that for a bit and does nothing.  If I click "Next" again, it errors telling me that it requires at least 7G of free disk space to continue.

I have never seen this behavior before.  What can be causing it?

Thanks

Bert


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