This should work with Breakaway Live, since you need the ability to have the input be the "soundcard" of the VM.
That being said… it’s very possible that the latency of the audio IO on the VM itself will be too high to use Breakaway for things like… video, and games.
Attention Mac Users there is a way! I just bought a new Mac Mini with Dual Core i7 and 8 gb ram to replace my 10 year old P4 XP machine. I have used BAE for a couple of years now to drive a micro FM Transmitter for our local condo association radio station and did not want to lose the sound processing of BAE but I have long wanted a Mac. I have Windows 7 64 bit installed in Parallels Desktop 7 with iTunes and BreakAway Audio Enhancer. Works perfectly! Sounds Great! I have my main iTunes Library installed in OSX Lion and use Windows installed iTunes to access the OSX Version’s shared library. This allows me to to import new files and do other file maintenance duties without disturbing the 24/7 station broadcast.