When you try to perform Item Level Recovery (ILR) in System Center Data Protection Manager 2010, you may get following message (see pic). "When DPM 2010 performs an item level recovery, it actually mounts VHD from the backup as a mountable file system on DPM server itself. Unfortunately, Windows Server 2008 (inside a guest) doesn't provide mount a VHD if you're actually in a VM already, so a virtualized DPM server can't mount the volume – hence the error."
Fortunately there'is a workaround we can use, which's to restore the .VHD as a file then mount it manually using Windows Server 2008 R2 disk management. From there you can browse the contents of the .vhd file system and manually restore your files.