Learn from the dev lead and PM of Windows Phone 7 Emulator on how it works and delivers the awesome performance.

Some key points

1. The emulator is essentially a x86 based Virtual Machine running full image of Windows Phone 7 OS
2. It emulates various peripherals (e.g. audio, networking), the list hopefully will grow in the future
3. Supports multi-touch if your host PC has a touch screen
4. It uses the GPU on the host PC to accelerate the graphics
5. Shameless plug: One of the reason it’s possible to emulate x86 and still have managed apps running as-is, is because the runtime (.NET Compact Framework) supports both x86 and ARM seamlessly (provides JITer for both architectures and runs the same managed code on both seamlessly)