Straight to your questions:
Silverlight has no direct access to the harddrive, so you cannot access information that is on the user's machine.
You have a file-open dialog with which you can ask the user to select image files and only then you will have access to them. Here is more information about the file-open dialog:
and about loading images from opened files:
Web service may not be the best way to serve an image, you need to retrieve the images from a database but expose them as a simple url that can be used in Silverlight. Unfortunately I cannot give you much guidance on that.
The example that I send you just "locks" he image while dragging, but wih a bit of maths you can add a delay effect, just replace this code:
|//Get where the canvas is located relative to the root:
|var canvasPosition = dropCanvas.TransformToVisual(null).Transform(new Point(0,0));
|var mousePosition = e.Options.CurrentDragPoint;
|//Move the image accordingly:
|Canvas.SetLeft(image, mousePosition.X - canvasPosition.X - image.ActualWidth/2);
|Canvas.SetTop(image, mousePosition.Y - canvasPosition.Y - image.ActualHeight/2);
with whatever you would like to happen (e.g. the image lagging behind your mouse, etc). Using a Storyboard to animate the image is also an option.
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