I agree that this feature is much-needed. We recently wrote a tool that manipulates images in-browser before upload.
In Firefox, you can use the data:uri specification to display certain types of files (HTML, text, images) which the user can then right-click and Save locally.
With Silverlight 1.1, we're given the power to perform substantial file manipulation client-side, it only makes sense that we are able to do something with these files other than relaying them back to the client through servers. I haven't been able to identify a way to do this with Flash, either, so this would give Silverlight a chance to innovate.
The security implications would be the same as downloading a file from a server.