As far as setting up the VM, what I recommend is boot using the bootup disc, and use fdisk to partition your virtual hard drive. Delete any existing partitions, and then just make one large primary partition. Reboot the VM, then format it:
After it finishes formatting, make it bootable
Make a new folder called Win95 on the hard drive
and then copy everything from the Win95 folder on your ISO to that directory
Code:
copy D:\Win95\* C:\Win95\
Finally, remove both the floppy and the cd drive and reboot. It should boot off of your virtual hard drive just fine. Then go into your Win95 directory
and run setup.exe. If you want, you can use setup /? to get a listing of parameters you can use. I usually skip a bunch of things like scandisk and making a boot disk.
An advantage of this is that it will record the installation media in the registry as being the Win95 folder on your virtual hard drive. As long as that folder is there, Windows will never ask you to insert your Windows 95 cd when installing optional components and during certain other operations. It's worth the small amount of space that Win95 folder takes up.