The screen shot you're showing has noting to do with installing from an ISO Image, it has to to with the virtual hard disk. The ISO Image is assigned to the CD/DVD in the Virtual Machine's Settings if you don't select it in the Wizard at the beginning.
From the documentation (built-in help file).
1 Select File > New.
2 The New Virtual Machine Assistant starts.
3 Click Continue without disc to go to the Installation Media panel.
4 In the Installation Media panel, click Use operating system installation disc or image.
5 Use the pop-down menu to browse for the .iso file for the operating system.
6 Click Open to identify the file, and click Continue to go to the Operating System panel.