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,
I've run the Android emulator inside a VM before. It was slower, but still usable to test basic apps. Also, the Android emulator was then slow to where you couldn't tell a difference from between native or from within running Eclipse from within a virtual machine running Linux
x86-to-x86 emulation tends to be pretty fast nowadays due to both Intel and AMD CPUs having hardware to help it along. A lot of x86-to-x86 emulation also doesn't do a full emulation (see Android's emulator to see how a full emulator runs in comparison). In the x86-to-x86 case, the faster ones will try to pass as many instructions to the host OS so that a chunk of the code runs natively
People have made claims like 80-95% performance, which is pretty good. If you have a 3.2 GHz CPU, you get knocked down to around a 2.4 GHz equivalent of your CPU. That's not bad at all, and I honestly don't notice that much overhead running in a good x86-to-x86 VM
The biggest reason why the WP emulator has problems with VMs doesn't have to deal with it being a VM-in-a-VM, but it's most likely that it requires DirectX 10. This might have to do with XNA, which is Microsoft's really nifty gaming API that lets you easily port between Windows, WP, and the Xbox 360. A lot of VM programs don't support hardware 3d acceleration
On another note: if you want to use a low-end system, AMD CPUs may fare better since AMD doesn't tend to disable hardware virtualization features in their lower-end CPUs