This is because of the security features in Windows 2008. Use this kb article to resolve the issue http://support.microsoft.com/kb/896861

I added a list web part and I wanted to convert it to a dataview so that I can modify its XSLT. When I did so  I got an error Unable to display this Web Part. To troubleshoot the problem, open this Web page in a Windows SharePoint Services-compatible HTML editor such as Microsoft Office SharePoint Designer. If the problem persists, contact your Web server administrator

However from SharePoint designer everything looked fine. Finally the only solution I found was to create a data view web part from a scratch and add the list as a data source to it.  I also added the list webpart so I can steal some of the XSLT. So in short the steps were

1)      For a publishing site Add a new page

2)      Open the page from SharePoint designer by detaching it from the page layout. ( Right click on the page in SPD and select the option detach from Layout.

3)      Click on a web part zone and select DataView menu and add a dataview web part

4)      On the RHS click the list that you want to use as a datasource and select show data.

5)      Drag all the fields on the dataview web part and then customize it till it looks like the way you want it to look.

I wanted to access some large files that existed on the C drive on my laptop from a VPC machine. For small files I usually drag and drop the files but for large you can share your C drive by following steps below:

From your VPC 2007

Edit -> Settings Click on Shared Folders

 Then Click on Share Folder and select the folders from your host pc that you would want to share.

Once you do this the shared folder will be available for viewing from your VPC as a network location