I’ve been looking around at physics engines for Silverlight and a couple have surfaced as being potentially usable.
Box2D
Although originally a C++ project (http://www.box2d.org/) there are C# ports available. One example can be found in the behaviours library available here: http://blois.us/blog/2010/03/labyrinth-sample-for-windows-phone.html. This code includes a Box2D.SL project.
What is interesting about this Box2D implementation is that it has been demonstrated to work on the Windows Phone 7.
Farseer
The Farseer Physics Engine is an easy to use 2D physics engine designed for Microsoft’s XNA and Silverlight platforms. The Farseer Physics Engine focuses on simplicity, useful features, and enabling the creation of fun, dynamic games.
I think Farseer has been used by the developer of Silversprite, the platform for allowing XNA games to run in Silverlight.
Physics Helper for Silverlight, WPF, Blend, and Farseer
The Physics Helper for Blend, Silverlight and WPF contains several Behaviors and controls which allow you to draw objects in Expression Blend 3, and have those objects translated directly into Physics objects using the Farseer Physics Engine. This can be a great timesaver for creating games, as it is traditionally difficult to line up underlying physics bodies and geometries with your Blend artwork.