DragonDropProcessFolder Virtual PC problem

If anyone have a solution to this problem please leave a comment.

To be able to drag and drop files between the host and the virtual PC Virtual Machine Additions needs to be installed.

Earlier I have had no problems to copy files from the Virtual PC to my host (Windows Vista) but recently it has stopped working. What happens is that a folder is instead created named DragonDropProcessFolder.

I have tried different tricks to get it working but failed so far.

Uninstalled Virtual Machine Additions
Uninstalled Virtual PC 2005
Rebooted the host
Reinstalled Virtual PC 2005
Installed Virtual Machine Additions
Rebooted the host

The following error shows up on the Virtual PC. "Virtual PC has encountered an error on the host while copying files. An error in Virtual PC has occurred (d3)."