A couple of months ago, I released a link on this blog to the source code for a project I created to simulate GPS on a Windows Phone 7. This is now packaged up to make it easier to use and has been deployed to codeplex. This can be found at http://wp7gps.codeplex.com.
Usage is described on the site but is straight forward, include FakeGPS.cs within your Windows Phone 7 project, modify your GeoPositionWatcher code to use the simulator and then build the route on the Silverlight control on the CodePlex site.
For a post on how to get started with location services within your application check out this getting started guide.