Usually the Repair function of the WP7.1 SDK is enough to fix all the issues. It runs the generation of the saved state of the emulator again.
Please try to delete files in %ProgramData%\Microsoft\XDE folder first (make sure you backup them somewhere else.), then run the emulator. If the emulator runs with a message "Windows Phone Emulator is doing a complete OS boot," let it boot. It takes some time though. This way you will know that the emulator actually can run on your computer. This won't generate a new saved state image, but the emulator should at least load.
Next, try installing WP7.1.1 SDK update from http://www.microsoft.com/en-us/download/details.aspx?id=29233. This update also installs additional 256MB emulator image besides the original 512MB image. It also generates emulator's saved states in the process, potentially fixing the issue.
If everything fails, then try these instructions to fix the saved state of the emulator:
- Uninstall WP7.1 SDK
- Manually delete these folders:
- %ProgramData%\Microsoft\XDE
- %LocalAppData%\Microsoft\XDE
- Install WP7.1 SDK again.
- Install WP7.1.1 SDK update: http://www.microsoft.com/en-us/download/details.aspx?id=29233.
Edit: Btw, have you tried to reboot your computer? Once this fixed the issue for me.