I'm not so sure about compatibility for long term development, but in last september, I remembering trying the Windows Phone 7.1beta SDK on VirtualBox (I'm using mac SL), a free virtual machine from oracle (previously by Sun) and it works well there.
I just do a regular install of Windows 7 Home Basic (any Win7 except Starter will do, CMIIW) in the VBox with no tweaking at all, install the GuestAddition inside win7 (provided by VBox), then install the SDK. I create new WP project, arrange UI, make some codes as usual, then run it in emulator. Surprisingly, the emulator works fairly well and showing the app I've developed.
I'm not even experience any lag (my macbook is i5, 4GB ram, the VBox setting is dual core, 2GB ram, note that no other heavy mac process is on the run, so I solely run the VBox ... and iTunes for listening musics).
So if you still want to try WP SDK 7.1 on VM, why don't you try VirtualBox? My current VBox is installed with Windows 8 and have no extra space to reinstall the win7+WPSDK. If you do give a try on VBox, please report the result here to inform everyone.