Wow that didn't take long... after attempting in vain to try and disable the wallpaper in the VM for about 15 minutes (the change wallpaper applet crashed everytime), I'm ditching Vista on Virtual Server. Even with 1Gb of RAM, a 16Gb vhd (sitting on a sata2 disk) and the VMAdditions for Vista Beta2, it was completely unusable. It had the CPU pegged at near 100% the whole time - there were no other VM's running and all I was doing was trying to disable the wallpaper!!!
So yeh, Vista RC1 on Virtual Server - just don't do it!