I came across this blog post by Eric Law and thought I’d share the info here. I just configured Fiddler on my computer and the tool worked beautifully!

Fiddler and the Windows Phone 7 Emulator
  1. Install Fiddler 2.3.0.7.
  2. Start Fiddler.
  3. Click Tools > Fiddler Options.
  4. Open the Connections tab and tick the Allow remote computers to connect box
  5. Click OK to close the Fiddler Options dialog.
  6. In the QuickExec box under the session list, type prefs set fiddler.network.proxy.registrationhostname HostName where HostName is the name of your desktop computer.
  7. Close and restart Fiddler.
  8. Start (or restart) the Windows Phone 7 Emulator.
  9. Open Internet Explorer on the Emulator.
  10. Observe, your traffic shows in Fiddler.