Chris,
We're working hard to reverse engineer the new Vista WebDAV protocol to fix this. It is extremely annoying that MS has done this and they're also getting a lot of flack for it from others. My only guess is that they want to head off any competition to Sharepoint this way.
About the explorer view: have you tried to use the 'manual' way to do this by going through 'Add Network Place'? If so did this work? If not then the problem is in the webDAV tuning. If successful, however, it signifies a problem in the browser's ability to spark the Windows Explorer window.
Note that there have been issues with opening the DMX root before. i.e.
http://myserver/dmxdav.axd/. Whereas any subdir would work like
http://myserver/dmxdav.axd/subdir. This was in part due to the fact that the webdav handler was not being hit in the former case.
These days I'm working on the WebDAV component quite intensely. Expect a new version to some out shortly. If you want to help and test the beta version let me know on peter at bring2mind dot net.
About the 'local intranet zone': I've noticed that on some clients this still did not allow unsigned ActiveX controls to be launched. Be sure to check the details of it.
That's all I can think of right now.
Thanks,
Peter Donker