By default the WP7 emulator will not react to you typing on the keyboard, instead you have to use the mouse to press keys on the software keyboard that pops up.
There is however a hidden feature that will let you use your hardware keyboard, just press Page Up when the software keyboard pops up.
And as an extra bonus the three buttons at the bottom of the phone can be activated using F1, F2 and F3 for back, home and search respectively.
Cool feature that makes development using the emulator a lot easier
Enjoy!
www.TheProblemSolver.nl
Wiki.WindowsWorkflowFoundation.eu