All my VSTS adventures so far, have involved using VPC’s to host the TFS and Team Suite environments. I wanted to quickly share my latest VSTS config that I am currently running on my laptop for anyone and everyone else who is either using VPC’s or thinking about it for VSTS demo’s, playing, sandboxing, etc. .
I just want to note that I rather hastily shoved another gig in my laptop a couple of months ago bringing it to a total of 2 gig so I could (kind of) comfortably work with the TFS monster in all its glory. 
Anyway the story goes like this.
I am running a single server install of TFS Beta 3 in a VPC and I have given it 1.1 gig RAM. It was a clean 2003 box with all patches applied.
On top of being the domain controller, this VPC is the monster that runs everything including the app and data TFS tier, SQL Server 2005 (with client tools) and VS 2005 Team Suite RC.
My local machine (laptop) is running XP Prof with the VS 2005 Team Suite RC also running.
The network connection between my local box and the VPC is a loop back adapter. Have look here for loop back install info.
What I then did was made my laptop a part of the domain I had created in my VPC so I could simulate separate machines on a network. Now, I am no infrastructure expert or networking guru but it seems to be working quite well and it displays all the characteristics of any running DC network. When my laptop reboots, the domain obviously is not available so I just log in locally as I always did. When the VPC fires up, network connection via the loop back is established and away I go! 
What I like about this setup is I can use VS 2005 from my local environment to connect to my TFS and also specify the particular user that I want to log in as. Every time I open an instance of the IDE, I get an auth box asking me who is connecting to the TFS this time.
This is really handy when using the permission structure in VSTS and identifying how components of TFS map domain users and groups to actions and privileges of certain TFS components ie, Reporting, Project Admin, etc.
You can also run VS 2005 under a different identity by right clicking on the short-cut for it and selecting the ‘Run-As’ option. This allows you to run the IDE with either the current user id with a safety net, or any other user that is on the network or local machine.