Rick Barraza from Cynergy has been doing some great work showing how to use WritableBitmap and PixelShaders to create some very interesting effects in Silverlight. Check out both
his recent posts Advanced Render Techniques with WriteableBitmaps and
Fluid Dynamics in Silverlight.
Charles Petzold posted a Flag Effect sample with source code for Silverlight. The image is diced up into many small square
representations of an area of the image that is then transformed in coordination with all of the other elements.