Microsoft has updated Virtual PC 2007 to support a few more guests. One of those guests is Windows Server 2008 Standard. I bold a very important word there. Windows Server 2008 Enterprise will install in a VM, but after that, most everything won't work. Windows Update fails, Internet Explorer crashes. Most importantly, SQL Server 2008 won't install, and it will throw an error saying that your .NET 2.0 version is incorrect.
So make sure that if you're putting VPC images of Server 2008 together that you're using Server 2008 Standard, the only version supported on Virtual PC 2007. Also, if you're still having trouble, make sure your VPC version is 18.104.22.168. The older versions don't work right with Server 2008 at all.