Have you got a USB zip drive? You can copy an iso on to a USB pen and make it bootable using this utility: http://emea.microsoftstore.com/UK/en-GB/Help/Windows-7-USB-DVD-Download-Tool.
I don't know if you're trying to have this install both virtualised and physical simultaneoulsy, so this is just a suggestion as to how to install without a CD Drive. I do know, however, that VMWare fusion in mac can virtualise it's bootcamp partition so that it can be run as both physical and virtual, however I think this may be something to do with the small Hardware Compatibility List that Apple has and that VMWare's virtual hardware is close enough to the actual spec of the machine that it doesn't notice the difference.
It could, however, be something as simple as kvm emulating IDE and then you try to boot from AHCI, as I know that causes blue-screens when switching between the two. Perhaps as a test try switching to IDE temporarily to see if it boots, if it does then try to create a VM with AHCI, or edit your current VM's registry and VM settings.