If you are visiting the Live Labs Web Sandbox today (thursday) and do not have Silverlight installed, the sample pages are accidentally prompting you to install Silverlight. We have a Silverlight version of our transformation engine (the client checkbox) and its installation is entirely optional. The Sandbox sample pages will be updated today to eliminate the default prompting (rather you choose you can opt-into installing SIlverlight by clicking the "Requires Silverlight" link next to the transform via: client or server checkboxes.
If you do not have Silverlight installed, the client option will be disabled (you can install it via the Requires Silverlight hyperlink next to the client button). With Siilverlight installed, the transformation will occur client-side rather than round-trip via our servers.
The only remaining issue is the bug bash sample is not working. That will be fixed in a few hours for server-side transformation. Silverlight will fail until we enable cross-domain access to the URL (client-side Silverlight transfomrations may not work for URL-based requests unless the destination server provides Silverlight with cross-domain access).