Windows 2003 Server as Domain Controller

I have a Windows 2003 Server virtual machine that I'm
trying to configure as a Domain Controller to test the
Group policies. For some reason I get a "General Network
Error" while I try to do that. I have a Microsoft loopback
adapter on the host machine (Windows XP Pro). The network
setting on all the virtual machines (sever and Windows XP
Pro ) are set to the loopback adapter. I assigned static
IP addresses of 192.168.2.x to all the vms and the host
machine's loopback adapter. I am actually trying to have a
different subnet for the virtual machines as I don't want
them on the original subnet (i.e with IP addresses of the
order of 192.168.1.x).

When I run the netdiag from support tools the following
tests fail.
1. NetBT Transports test failed (NERR_WkstaNotStarted)
2. Default gateway test failed
3. DNS test failed (No DNS servers are configured)

Any suggestions as to why this "General network error".
Any workaround for this. Please suggest!

Thanks