Well I think your system is simply to weak.
2GB RAM itself are enough to use windows 7 and some aplications but for your purpose that should be not enough. From myself developing (not for mobile devices though) I know that you have at least some different tools open besides your IDE. Visual Studio 2010 itself is not so memory hungry, but the Ultimate Edition (can) install a lot of junk. The whole sql database stuff and more, I personally never used that though. I guess there is a browser open, too, maybe some pdf-reader and some text editor. Your chat client etc pp.
All this stuff eats up memory and emulation itself is a very complex task to do. Eg a gameboy itself is not a very powerful device, but emulating a gameboy can eat a lot of a x86 CPUs power, because of architectural differences. Emulating the Win Phone Architecture will surely be a heavy task, too.
The WinPhone SDK has a minimum memory requirement of 3GB RAM. If you don't have enough memory available your OS will begin swapping memory to the harddrive, because you don't have enough memory available for the application itself this can lead windows to swap parts of the application away that it will need just seconds later. Windows basically does not execute the SDK from RAM (as it should) but from your harddrive. And besides all of that your CPU will have to emulate some other architecture.
I think you are just trying to stretch your computer far beyond its abilities.