I've been developing in a similar environment for over a year now. I have a linux VM running apache + associated software, with Samba running. I mount my code as a shared drive, and edit it that way. This means I get the power of linux + linux tools, but I can still run Windows as my primary OS.

I am perfectly happy with this setup, and haven't run across any downsides.

I've seen it done for years in a reasonably sized team. It actually works really well in a fulltime scenario on a large project, on decent desktop boxes in an office environment.

Developers appreciated that significant config changes boiled down to: get all of your local changes into version control, then grab the newest VM image off the network drive.

It's significantly more painful when you get out of that environment. If you have lots of projects, juggling VMs is a pain. They take up lots of space. Spinning them up/down takes minutes. You don't just have one working IP/hostname/Samba mount/etc that's always there. The resource hit from running a VM is a bigger deal on a netbook. Etc..

What is so difficult to imagine about an Ubuntu machine running server software?