You can extract all files from the .iso image to the hard drive and run the setup.exe from there.
I did it when I got error messages trying a ordinary installation from cdrom drive, worked super.
That's because the boot sector of the Windows 7 installation DVD is not fully compatible with ISO9660 standard. But you can create a bootable disk. Take a correct boot sector from other bootable disk (e.g. Vista) and merge it into the Windows 7 installation disk. See Link Removed.