I had the same problem trying to test my multiplayer game, and I eventually bought a WP7 (HTC HD7) device on ebay, unlocked it for development purposes, and used it and the emulator for testing.
Since I have experience with the Android environment, I can say that rejecting the possibility of multiple instances of the emulator is really detrimental to the efforts of the developers. Microsoft's hope will change that.
By the way, I use the Skiller SDK for the multi-user and social side of my game (their official WP7 SDK will be available in a few days, and you can download it from http://dev.skiller-games.com ). I totally recommend it.
Good luck.
MrWhiteYoo
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