Yes, that demo was at PDC09 (or maybe it was even PDC08). I was revealed more recently that it was basically hacked together using p/invokes and that the feature never actually made it to the development stage. Not sure why they decided to demo it in that case. Given how far off the SL5 release is, I wouldn't be surprised if the code in that keynote demo was just calling out to Managed DirectX or something like that.
I remember seeing a technology demo awhile back where someone on the WPF team was demonstrating an application that used both xna and wpf. that is to say the background of the window was an xna surface but wpf controls were being composited on top. I also recall Shawn Hargreaves hinting that they were looking into ways to be able to use silverlight and XNA in the same application on WP7.