1. Install your virtual clients running Windows 2008 Enterprise and make sure they have basic connectivity to each other.  I used the node names and joined them to the contoso domain.

  NODEV2
  NODEV3

2. Install a free iSCSI SAN software to emulate a iSCSI SAN on host machine or new virtual machine, there are many vendors (http://starwindsoftware.com/, http://sourceforge.net/project/showfiles.php?group_id=90725, etc)

3. Create a new iSCSI target using the "Microsoft iSCSI Target Software' snap-in in Administrative Tools

 3a.  Add 2 drives to the target.   The quorum has to be at least 500MB
 3b.  Set the IQN to a simple name.   I used SANCON1 (Properties | iSCSI Initiators )
 3c. Make sure to disable 'Enforce Idle Timeout' on the Target properties - Advanced tab
 3d. I found it easier to use the CHAP authentication so you may want to use CHAP
 3e. Setup a second IQN with a simple name like RDORR2 and use that to configure the 2nd node's iSCSI initiator.  You want each node to have a unique connection path to the drive is reserved on each node and failover will work.   If you use the same IQN you get 'already connected' errors and you can't failover and see the media.

4. On one virtual machine use the Administrator Tools | iSCSC Initiator to connect to the target.

 4a. Discovery Tab  (MACHINE.contoso.com)
 4b. Use the Advanced option to set the Local Adapter to the iSCSI initiator
 4c. General Tab | Change - Use the simple
 4d. Targets Tab | Refresh and Use the Logon button to establish a automatic connection

 Reference: http://edge.technet.com/Media/How-to-setup-iSCSI-on-Windows-Server-2008-11-mins/

5. Use disk manager to add the two drives (iSCSI) to the (one) virtual machine (MBR - Basic disk - Simple partitions - NTFS required)

8. Run the Administrator Tools | Failover Cluster Management and 'Validate a Configuration'

9. Create a cluster.  (Single node for the virtual machine with the iSCSI connected drives)

 9a. Add the smallest iSCSI disk to you cluster storage and make sure status is ONLINE
 9b. On the cluster node itself | Right mouse | More Actions | Cluster Quorum - Node and Disk Majority - Establish the quorum drive for the cluster
 9d. Add the other iSCSI disk to the cluster storage and make sure status is ONLINE  (Available Storage)

10. Install SQL (new failover installation)
 
 Note:  Use a local copy of setup so the network activity does not get interrupted and cause a feature to fail installation.

 10a. Use the iSCSI locations for the database so it becomes a shared resource.   When you get to the Cluster Resource Group add your new cluster group name
 10b. Pick the features you want carefully as some can't be added later.
 10c. I only bound to IPV4 to avoid binding issues with IPV6 for a simple setup scenario.  

11. Add the second node (Add Node)  to the cluster (Windows) - Failover Cluster Manager

12. Add the second node (Add Node) to the cluster (SQL) - SQL Server Setup

Note:  Connect using the node name or (.) to connect to the cluster regardless of the cluster running state

Note: Currently using SQL Server 2008 clustered instance on virtual environment is not supported, only if it's a standalone.