Coincidentally, I just installed OS3.9 with full Picasso96 support with WinUAE 0.8.22R6 last night. This is how I did it...
1. I put an ADF of Workbench 3.1 in DF0 and mapped the AmigaOS3.9 CD as a hard drive in DH0.
2. When Workbench 3.1 booted, I created an emergency boot disk (as an ADF file) from the AmigaOS3.9 CD (in DH0).
3. I then booted from the ADF emergency boot disk, with hard drives (actually PC directories) mapped to DH0, DH1, and DH2. I mapped the AmigaOS3.9 CD as DH3 this time.
4. I then installed OS3.9 from DH3 onto DH0.
5. When asked something like "Do you want to install CD-ROM drivers and drivers for your graphics card?" I clicked NO, even though I did have a gfx card (well, a uae gfx card anyway!). CD-ROM drivers are provided through WinUAE's emulation and do not need to be installed. Similarly, you should not install the TCP/ICP stack either, since this is provided through WinUAE's emulation too.
6. When OS3.9 finished installing, I rebooted into the fresh install of OS3.9 and installed Picasso96 in the usual way.
Everything works perfectly!
I have a 1024x768 32-bit 16million colour workbench!
To use a CD, just load WinUAE with "Add PC drives at startup" enabled on the hard disk tab, and the CD already in your PC's drive.
Hope this helps,
Steve.