VxD are the 32 bit vitual device drivers (as you thought). When they install they 'vitualize' the hardware - in other words, they take complete control of the hardware resource and then only allow access to that resource through it.
So, for instance, the vkd.vxd is the keyboard VxD. It takes control of the keyboard interrupts, keyboard controller interfacing and BIOS keyboard handlers and then only allows access to the keyboard via itself.
This is one of the 'secret', hidden ways that modern multitasking OS's work. If a program was trying to access a hardware device itself only one at a time could do it, as the program need full control during its access. The VxD routes all requests and then feeds the information back to the program. So multiple software threads can call the same device, but the hardware only sees one - the VxD.
The OS is made up of 'rings', planned in a 'stack'. Each ring can access the ring above, but not the ring below. The VxD's operate in Ring 0, the lowest level where all core OS functions are. They are supposed to be protected (this is where you get 'protected mode' operation) from programs running above it, which are not as crucial. But Windows' memory protection kinda stinks, and that is where you get the Blue Screens from - the OS failed to protect the memory, and therefore the functionality, of a core component running in Ring 0.
(I am trying to say all this in nice readable terms) VxD's are the very core of how things work - this is why you cannot just fool around with them. You have to know what is happening or else.
The errors you've received are, as suggested, probably related to the network stack. The simpliest way to remove those errors, indeed if it is the network, is to completely remove all network components, reboot, reinstall, reboot.
But sometimes it's other problems - that with the error report I can help. It is not a crucial IOS system, as if it were Windows wouldn't run at all in protected (normal) mode.
Yes, you can figure out what is happening via the error messages - but, sometimes, a problem here causes an error there. The driver stack on Windows is so complicated 1 weak link can cause a cascade failure, which is hard to find.
You can indeed look in system.ini for bad VxD errors - but only legacy 16 bit program VxD installs will be there - all other 32 bit drives must write their VxD entries into the Registry, as per Microsoft's compatability directive (OK, some just don't listen...)
Your mileage may vary...