Kind of strange. I got:
devio 9999 N:\VirtualMachines\VirtualPC\vpc3.vhd 1 1 detected VHD...waiting... imdisk -a -t proxy -o ip -f 127.0.0.1:9999 -m L: -S 512 Got connection from 127.0.0.1:50906 (instead of :9999 - reported by devio)
That is expected, to and from normally have different numbers. The incoming call comes from port 50906 to port 9999. Nothing wrong there. It also shows that devio actually receives connection request so there is most probably not a firewall problem or in any other way related to tcp/ip. But just to be sure you could always try shared memory communication instead.
devio shm:vpc3 N:\VirtualMachines\VirtualPC\vpc3.vhd 1 1 detected VHD...waiting... imdisk -a -t proxy -o shm -f vpc3 -m L: -S 512
...but I don't think there will be any difference.
Error creating virtual disk: The handle is invalid. (reported by ImDisk)
What can cause the problem? Firewall is OFF, latest versions, letter L: available...
Sounds strange. I just tested similar here and it works. Does it work with other vhd files?