Ok, I've finally solved it!

I've finally been able to install Lucid server on VPC.
The kernel params needed are:
vga16fb.blacklist=yes  vga=788

By doing this, the vesafb module will be used during install, and you
can actually see what you're doing - Yay!

Then when the machine reboots, you need to interrupt GRUB by holding SHIFT.
Insert the following line just before the 'insmod' line:
set gfxpayload=keep

Done! You've installed and booted Lucid server in MS Virtual PC.
To avoid having to interrupt GRUB each time you boot, add the following line 
to: /etc/default/grub
GRUB_GFXPAYLOAD_LINUX="keep"
Then run: sudo update-grub

-- 
Unable to install lucid lynx 10.04 in Virtual PC virtual Machine
https://bugs.launchpad.net/bugs/556744
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