I was running into this issue and it made things difficult.
I was running VPC 2007 SP1, Win 2008 Server, WSS 3.0 SP2 and I was unable to view the SharePoint document libraries in explorer view.
I needed to add the feature “Desktop Experience” on my server to fix this issue. Many thanks to Tihomir for posting this fix.
http://tihomirignatov.blogspot.com/2009/08/sharepoint-error-message-your-client.html
