It took me a while to figure this out (but then once I found it, I found it again and again). If you want to machine debug a virtual machine (vpc) with WinDBG, you need to:

• set up the VPC to be debugged (msconfig.exe; boot tab; advanced options)
• set up a COM port for a named pipe (in VPC settings COM1 you can select named pipe and give it a name like \\.\pipe\ThePipe)
• configure WinDbg to kernel debug (specify the same \\.\pipe\ThePipe in File\Kernel Debug, COM tab, Port text box).

Once I had it working, I found it immediately in this Advanced Windows Debugging book.