Have you tried Virtual CloneDrive from Elaborate Bytes? It is available for free from http://www.elby.ch/fun/software/index.html
It lets you create up to eight virtual CD/DVD drives for mounting ISO images.
I've used it under Windows XP and Windows Server 2003, and find it very useful when working with ISO's and VM's.
I used the utility you mentioned for XP on a W2K3 R2 box this weekend and it worked fine. There are other more elegant solutions, but this worked in a pinch.
Do you think it's possible (likely) that Microsoft will ever natively support ISO images? Wouldn't that be great?
Also, another great tool is Daemon Tools. They just released a new version that works great!
It's free, too.
ISOBuster can extract a single file at a time, there is no need to extract the whole ISO to disk. Just drag and drop the file(s) you want extracted. Works fine for me with v1.8