403 access forbidden on images in sites/example.com/files

Hello. I recently installed XAMPP version 1.6.5 which is using Apache 2.2.6, MySQL 5.0.51, PHP 5.2.5 + PHP 4.4.7 + PEAR. I have installed Drupal 5.5 and am trying to configure a multisite sandbox installation to run off a networked (my account doesn't have admin rights) Windows XP SP2 system. My browsers are Firefox 2 and IE6.

The folder structure i am using is;

C:\xampp\htdocs\drupal-5.5\sites\example.local\files\
C:\xampp\htdocs\drupal-5.5\sites\example.local\modules\
C:\xampp\htdocs\drupal-5.5\sites\example.local\themes\
C:\xampp\htdocs\drupal-5.5\sites\example.local\tmp\
C:\xampp\htdocs\drupal-5.5\sites\example.local\settings.php

C:\xampp\htdocs\drupal-5.5\sites\test.local\files\
C:\xampp\htdocs\drupal-5.5\sites\test.local\modules\
C:\xampp\htdocs\drupal-5.5\sites\test.local\themes\
C:\xampp\htdocs\drupal-5.5\sites\test.local\tmp\
C:\xampp\htdocs\drupal-5.5\sites\test.local\settings.php

i have added;

127.0.0.1	example.local
127.0.0.1	test.local

to C:\WINDOWS\system32\drivers\etc\hosts

i also added;

LoadModule rewrite_module modules/mod_rewrite.so

NameVirtualHost *:80

<VirtualHost *:80>
        DocumentRoot "c:/xampp/htdocs/drupal-5.5"
        ServerName example.local
        ServerAlias  *.example.local
        <Directory "c:/xampp/htdocs/drupal-5.5">
                Allow from all
                Options +Includes +Indexes +FollowSymLinks
                AllowOverride all
        </Directory>
</VirtualHost>

<VirtualHost *:80>
        DocumentRoot "c:/xampp/htdocs/drupal-5.5"
        ServerName test.local
        ServerAlias  *.test.local
        <Directory "c:/xampp/htdocs/drupal-5.5">
                Allow from all
                Options +Includes +Indexes +FollowSymLinks
                AllowOverride all
        </Directory>
</VirtualHost>

to C:\xampp\apache\conf\httpd.conf

Everything seems to work fine so far except when i attempt to insert an inline image using TinyMCE and IMCE into a node. The file gets uploaded to the folder but when i preview the node it only displays the ALT text. If i right click the ALT text and 'view image' i get the following error;

Access forbidden!

You don't have permission to access the requested object. It is either read-protected or not readable by the server.

If you think this is a server error, please contact the webmaster.
Error 403
example.local
01/23/08 12:22:34
Apache/2.2.6 (Win32) DAV/2 mod_ssl/2.2.6 OpenSSL/0.9.8g mod_autoindex_color PHP/5.2.5 

I have tried other 'image insertion modules' and keep getting the same issue of images not displaying (which i noticed other new drupal users have been reporting also). It appears to me that it is a permissions setting problem but because i know so little about apache, php, mysql and drupal, i am not sure how to resolve it. i have spent the past 2 days searching google and the drupal forums on ways to fix it but had no luck.

If the image is physically located in C:\xampp\htdocs\drupal-5.5\files\ then it displays fine but because it is a multisite installation i would rather each website to use it's individual example.local\files folder.

Do i need to alter .htaccess files, httpd.conf file or use smylinks to fix this?

Thank you in advance and i look forward to contributing to the drupal community, after overcomming the initial learning hurdles that is, lol.