Since I was remoting into a Windows 7 machine from an XP, I had to do this trick on my older XP and then disconnect. When I reconnected (make sure you have the "Clipboard" option selected) everything worked fine.
Follow the following instruction in both local and remote computers.
Go to Start->Control Panel->Administrative Tools->Services. Enable and start the following services in the order shown below:
1. Network DDE DSDM 2. Network DDE 3. ClipBook
If you want to see the clipboard action in live:
You can go to Start->Run and type clipbrd and click OK to run clip board viewer. You will be shown current clipboard objects in this viewer.
Now you can use standard copy/paste menu options of the applications in both the computers to exchange the data.
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