Ok. I seem to be missing something here. Everyone else seems to be using Flash Drives.
The way you use the iso with your virtualization software is the way it should be done.
The flash drive part comes in when you use the VM booted from the ISO and then install AROS onto a flash drive.
It is required to make the flash drive partitioned the Amiga way and which uses the Amiga filesystem. Once you have that done you can then use the flash drive to try and boot the installed AROS distribution directly on your hardware.
And by the looks of it, that seem to fail for some people.
afaik grub does not support mouse but it should detect the keyboard so that you are able to select a grub option or modify the grub entry. If you try to use the grub menu from the VM (when you boot the ISO) then it might require some additional VM setup in order to make your keyboard work that early in the boot process with grub (for VBox I have/had to setup USB filtering correctly, not sure if that is still required) but your mileage may vary.