I don't get the built in microphone to
work (why??), but the microphone in my
MS web-cam works.
The above solution should be tried both with Integration Features enabled/disabled. Some people had luck with completely uninstalling and reinstalling them and rebooting,
The only way of really getting around the virtual hardware in the VM that I am aware of, is the use of USB devices which should transparently work as designed within the VM.
If you are thinking about giving up on Virtual PC, then I suggest VirtualBox, which is both free and excellent quality.
Best Answer
The default is in the My Virtual Machines folder under My Documents, but you can specify something else on creation: