Since TeX cannot cope with file names with spaces in them, I tried to give the path to my files as c:\docume~1\stoledo\desktop instead of c:\Documents and Settings. This was supposed to work, but it didn't. After a while I figured that it is because lyx inserts a [EMAIL PROTECTED] command before the \documentstyle, to tell tex where to look for files. Since ~ is a special char, this creates a problem.
I was able to fix this manually in the files that lyx produces to run latex by using the following construct, instead of the original header:
\bgroup \makeatletter \catcode`\~=11 [EMAIL PROTECTED]:/docume~1/stoledo/desktop/Projects//}} \makeatother \egroup
The \bgroup..\egroup are there to ensure that the \catcode command is local, but the definition is \global so it holds after the group ends. This seems to fix the problem. I think that it's worth putting this patch into the win32 lyx sources.
Sivan