Vista - Precompactor Issues

I am attempting to use the Precompactor, used it several times before. Here
is my config

Virtual PC SP1 with KB 958162 update for MED-V
Virtual Machine running on external USB Drive
Virtual Machine Windows XP SP3

Everytime I run the precompactor, after defrag it gives me an error as
follows:

Can't Create File

The Precompactor utility was unable to create any temporary files in teh
root directory. Make sure you are running as a user with full read/write
access to teh root directories of all local hard disks before using this
utility.

I am logged in as the administrator account and have tried running it
directly from the exe, using Run As to ensure proper account used, and other
unsuccessful options.

any help would be appreciated

mattmcdermott