I was looking for more examples of peoplem having trouble with the MDS.
This is what you might need.
Blackberry MDS simulator - Canxxx39;t connect to the internet in the simulator. - Stack Overflow
It worked for me.
Also I saw somebody suggest installing it in C:\ that might get over your other problem.
Good luck. You have to wonder why Blackberry don't use the installer to help people avoid problems like this. It seems like plenty of people go throught the same pain with the MDS.