When I first switched to Hyper-V for desktop VM use, I discovered horrible graphics performance.  The reason boils down to how the new WDDM driver model used in Vista and later interacts with the hypervisor.  Apparently, many people have reported this problem, and some have complained that this hasn’t been fixed in Hyper-V R2.  However, that’s not exactly true.

Windows Server 2008 R2 has added support for Second Level Address Translation (SLAT); Intel calls this feature Extended Page Tables (EPT), while AMD calls it Nested Page Tables (NPT) or Rapid Virtualization Indexing (RVI).  On hardware that supports this, and with Server 2008 R2 Hyper-V for your VM solution, modern graphics cards (and their associated WDDM 1.0/1.1 drivers) work fine.  The catch is that you need an Intel i7 (Nehalem) processor or a recent AMD processor to have that support — Intel Core 2 Duos and Quads don’t support EPT.  This prompted me to switch from my C2D E8400 to an i7 920 for my desktop VM machine while keeping the same nVidia 9600GT for video; with 2008 R2, Hyper-V no longer suffers from the horrible slowdown despite using the latest 190.62 drivers. Hooray!