Philip Jenvey started a fork of virtualenv with Distribute support: http://bitbucket.org/pjenvey/virtualenv-distribute/ Right now there's some other higher priority things for virtualenv (i.e., straight up bug fixes and long requested features), and I want to get pip into environments (avoiding easy_install pip, which feels too ironic), and once pip is in then it would be necessary that Distribute be compatible with pip before this work could get merged.
It would be ideal from my perspective if virtualenv could install Distribute in addition to Setuptools, not instead of Setuptools. This would be the least likely to cause backward compatibility issues for users, and people could transition at their own pace. I'm not really clear how compatible the two are. Also it would be advantageous to just have one line of development, so the newest virtualenv always installs the newest Distribute, and it's clear what that is (no different branches, no backward-compatible-breaking releases, etc).
Of course, you will always be able to install Distribute into a virtualenv after creating it -- virtualenv's relationship to Setuptools is purely to bootstrap an environment to a useful state, and even if it installs pip you can always uninstall pip (or just mess with the environment so as to break pip, and then just not use pip).