I also had this problem, and for a while I was thinking it might have to do with my machine being 64-bit, or a permissions issue, but I have no way of confirming it.
However, I was able to solve it by using the template on this Code Project site:
http://www.codeproject.com/KB/gadgets/HeterodoxGadgetTemplate.aspx
The nice thing about the template is that it's setup as a Windows application. When you run the app it handles the local deployment of your gadget and starts the sidebar service (sidebar.exe). I believe this probably gets around a number of permissions issues.
After setting up a new project using this template, I was able to successfully debug the JavaScript using the "debugger" methods explained everywhere else (for example: http://msdn.microsoft.com/en-us/library/bb456467%28v=vs.85%29.aspx).