So the first screen comes up, copying files, then the reboot, then the fancier blue install screen with the fascinating messages and the progress bar on the left, is that right? Is that where you see the error?
Ok, that Microsoft article kinda points to what my second thought was. The VM does not have access to the physical CD for whatever reason.
Try this:
1. Use this article to make a disk image of the cd rom:
http://www.slashdotdash.net/articles/2006/08/14/create-iso-cd-dvd-image-with-mac-os-x-tiger-10-4 It works with Leopard as well.
2. In Fusion, before starting your vm (Virtual Machine), go into the settings of that vm
3. On the left click on Removable Devices
4. Then click on CD/DVD and on the right panel, ensure that the "Connected" is checked.
5. Then below, check the "Use disk image:" and select the .iso you created in step 1.
6. Click on Apply and boot up the VM.
At this point you should have removed the physical CD rom from the drive to ensure the VM is booting ok from the image.
Let me know if that works for you.
If you get really stuck, and you're on Leopard, we might be able to use Screen Sharing to get this resolved.