Thank you Hilary Stoupa, for looking into this issue.
I got the following error while trying to preview the form in design mode on Client 2.

System.Security.SecurityException
Request failed.
at Microsoft.Office.InfoPath.MsxmlNavigator.IsValidNode(MsxmlNode test)
at Microsoft.Office.InfoPath.MsxmlNavigator.MoveToFirstChild()
at MS.Internal.Xml.XPath.XPathChildIterator.MoveNext()
at MS.Internal.Xml.XPath.ChildrenQuery.Advance()
at MS.Internal.Xml.XPath.AttributeQuery.Advance()
at MS.Internal.Xml.XPath.XPathSelectionIterator.MoveNext()
at System.Xml.XPath.XPathNavigator.SelectSingleNode(XPathExpression expression)
at System.Xml.XPath.XPathNavigator.SelectSingleNode(String xpath)
at Qdabra.Tools.RulesLibrary.Commands.ExecuteCommand()
at Qdabra.Tools.RulesLibrary.qRulesMain.ExecuteCommand(XmlEventArgs e)
at Qdabra.Tools.RulesLibrary.FormCode.QdabraRules__Command_Changed(Object sender, XmlEventArgs e)
at Microsoft.Office.InfoPath.Internal.XmlEventHost.GenericProxy(Object genericDelegate, DataDOMEvent dataDOMEvent, InfoPathEvents type)
at Microsoft.Office.InfoPath.Internal.XmlEventHost.ChangedProxy(DataDOMEvent dataDOMEvent)
at Microsoft.Office.Interop.InfoPath.SemiTrust._DataDOMEventSink_SinkHelper.OnAfterChange(DataDOMEvent pDataDOMEvent)
Googling for this error led me to take a shot at upgrading MS Office to the latest service pack.
Client 2 (the machine having the issue) was having the original release [Version:12.0.4518.1014] of Microsoft Office InfoPath 2007. Upgrading it to SP3 [Version:12.0.6606.1000] fixed it.
Thanks again for helping me to narrow down the problem.