Jaime Rodriguez talks about some image tools/libraries that allow you to use GIF files in your WP7 app.
Source: The Blog of Jaime Rodriguez
As you know, Silverlight does not have native support for decoding gif images. That is downer, but not a showstopper since several 3rd party, opensource libraries for decoding Gifs. 
The Twitter for Windows Phone team used the ImageTools project from Codeplex to decode gifs. It worked well, but when we implemented there were two things that bothered me a little:
- The decoder was not perfect. In our experience, it does ~90% of the images we tested [and that was thousands of images, so representative test]
- There was one infinite loop that bothered me. Has to do with nextflag during decoding. The Decoder checks for flags to be != 0, and for some odd reason we have seen gifs with nextFlag = –1; this can send your app into an infinite loop.