It took me four times to fail installing Vista inside VMWare till I figured out that I should google for the answer…
So here it is… the steps you need to do in order to install Vista inside VMWare:
Installing the Guest Operating System
1. Insert the Windows Vista CD in the CD-ROM drive (or just mount the ISO image).
2. Power on the virtual machine to start installing Windows Vista.
3. If using a blank hard disk: When the Windows Vista installer menu appears, choose the first option, Install Now.
If installing over an existing guest operating system: Skip to step 9.
4. Press Shift-F10 to open a command prompt.
5. Start the disk partitioning utility.
6. Enter the following commands to partition the hard disk:
select disk 0
create partition primary
7. When the partitioning process is complete, click the Reset button to reboot the virtual machine.
8. As the virtual machine begins to reboot, while the VMware logo appears on the screen, click inside the virtual machine window, then press Esc to get to the BIOS boot menu. Choose CD-ROM Drive as the boot device, then continue installing Windows Vista beta.
9. In certain Windows Vista builds, the installer chooses an incorrect default in the screen titled Choose your installation destination. It shows a partition with 0 MB free and makes that partition the default destination.
At that screen, you must change the choice to the disk (instead of the partition), then click Continue.
10. Follow the remaining installation steps as you would for a physical machine.For further instructions check VMWare site