Ah looks like I ran into a different problem in my exploration of BLM LSIS. It is not a problem with Transparent=True but a problem with Silverlight’s support of 24 bit png.
Vish’s Rambling adds some discussion as well.
It is interesting to note how reluctant Microsoft is to admit to a bug of any kind. I guess it is a big target for the lawyers, but I’ve never seen that kind of reluctance in the Open Source world.
Hopefully Silverlight support for png transparency will be cleared up in a future release.