That symptom indicates the service cannot be found. Note that you cannot use localhost in your address, as you might have been doing in WP7, because the emulator is a completely different computer instance with its own internal localhost.
Before you can connect successfully from the emulator to the local web service, you have to make two changes:
You have to reconfigure the local web service and web server to accept connections from other devices on the network.
You have to reconfigure the service reference in the Windows Phone app to connect to the service by using the IP address of the development computer on which the service is running.
There are plans afoot to update the MSDN documentation to explain this in further detail.