I have an 8 month old male puppy whose testicles haven't dropped. Can he impregnate an 8 month old puppy in heat?

Both of them haven't dropped? If so, your dog will be sterile and therefore cannot impregnate a female dog.

HOWEVER, he really should be neutered. Not because of impregnation (because that won't happen), but because cryptorchid dogs have a higher instance of testicular cancer, as well as torsion.

A totally separate issue is that your dog at 8 months should NOT be bred, descended testicles or not. That's a side issue.

I wouldn't be so quick to say he is sterile. Sterility in cryptorchid cases is the result of too prolonged temperature exposure in the body cavity for the developing sperm to survive.
At 8 months old, I would not trust in his being sterile, in case there is a female who could be bred by him. Nor would I try to breed him, since his problem has some genetic transmission potential, either to his immediate male progeny, as well as the future male generations.
The temptation may be to not 'go after' the retained testes because he is possibly sterile, but... he does have the increased potential for testicular malignancies. Expect the surgery to be about as costly as a spay operation, I suspect.

I was always told that crytorchids, if bred, had "problem babies"?

Not always, and there are many dogs that have only one descended testicle... which works 'just fine'. If both are undescended, the dog has a chance (Not a gambler... I don't give odds) of having crypto male puppies. As for other problems, I haven't heard that, but there's lots I'm not aware of, and growing every day.

The longer the testes remain within the body cavity, they are subject to the effects of 'extra' heat. The main effect this has is on the motility of the sperm, rendering the dog less 'fertile'. Whether it gets even worse or not is up for speculation, as far as I know. Not aware of any study, or even curiosity as to birth defects related to cryptorchidism, but there is ample evidence for increased testicular malignancies.

So, to paraphrase an old saying.. "..dig 'em out, if ya got 'em."