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It seems that the Windows Phone 7 SDK doesn’t support running inside a VM. On Parallels, the entire VM simply crashes when the emulator is starting up.
Around the web, though, a few people have reported that they were able to use it by changing a lot of the VM settings.
What do I have to change to be able to run it? I’m specially interested in Parallels, but VMWare or any other simulator that run on OSX if fine for me!
The WinPhone7 (and WinPhone8) emulator is itself a VM and few (if any) general-purpose VM’s will host another VM infrastructure, which is why it crashes Parallels etc.
If you want to have the emulator run from within a different VM to the one MS provides, then you’re into the realm of extracting images, toggling bits and trying to tack it into your VM of choice. Of course, the chances of the emulator then working as expected with no residual issues is as close to nil as makes no difference 😉
[Update 2013-01-30] VMWare5 & Parallels Desktop 8 now support running Hyper-V guest VM’s. This is particularly useful for those wanting to develop against the Windows Phone 8 SDK which runs Windows Phone 8 guest VM’s on Hyper-V.
Here’s a guide to how to run Visual Studio 2012 & Windows 8 SDK (inc. the Windows Phone 8 Hyper-V-based emulator) in VMWare5 or Parallels desktop 5: Link
Note: Running Windows & Hyper-V inside a VM will be slower than running natively. Dual-booting into Windows (using Boot Camp on OSX) is stil the recommended method of developing for the Windows platform, especially if you want to use Hyper-V guest VM’s.