I know it has been done before, I know that it may not have any sense to have virtual machine inside another virtual machine, but I just had to try it for myself. Since I am doing a session on Windows Server 2008 R2 for Windays 2009 conference, I installed it on a test machine and set up few virtual machines in it (Windows Server 2008 R2 Beta 1, Windows XP and Ubuntu :)). Then I tried to install Virtual PC inside virtualized Win2k8 R2 server, but I got several weird errors so I gave up on that. Installing Virtual PC 2007 inside virtualized Windows XP went like a breeze. Using Virtual PC I installed Windows 98 SE in virtualized Windows XP, and guess what, it works, and it works very well and fast as soon as I installed Virtual Machine Additions.
Of course, you can not install Hyper-V inside Hyper-V. 🙂