Windows Phone 7 Marketplace lets you peek at any app's source code
It has just been discovered that it's possible to download any Windows Phone 7 XAP full application package directly from Microsoft's Marketplace server -- no need to use a Windows Phone 7 device or the Zune application. This is possible because the Zune application uses Atom XML feeds to get the applications' information, so it's fairly easy to grab a direct link to the full app package just by looking at the XML. Once you have the XAP, you can unzip it and get access to all the assets and resources that app uses. And, by using a tool such as Reflector, you may even get to peek at the app's source code. One thing of note is that the XAP can't be installed on a retail WP7 handset, although it can be used in an emulator.
It looks like Microsoft's solution to this for now is asking developers to use code obfuscation tools, such as DotFuscator, before submitting the apps into the Marketplace. Unfortunately that tool has only been out for a few days, so not many app developers have had the possibility to use it yet. Furthermore, the commercial edition of DotFuscator can be pretty expensive for those developing 99-cent apps in their basements.
The easy fix would be to have all the XAPs encrypted, but Microsoft hasn't said anything about when that will become reality -- a fix is coming, though. Until that happens, closed is apparently the new open.