Four years later but I still had this problem, so hopefully this answer will help someone else.
What's going on here is that the Virtual PC software needs to connect to the virtual machine via RDP, but insists on attaching your real machine's domain to the credentials. So even though you've created a local administrator account on the VPC, or are using the built-in one, you still can't log in to the VM with those credentials.
You can solve this by prefixing your username with a backslash to scrub the domain, e.g. if using the built in IEUser account
Username: \IEUser Password: Passw0rd1
Worked for me.