Take a look at this post on my blog:
http://blogs.msdn.com/b/swick/archive/2011/04/07/image-tips-for-windows-phone-7.aspx
Specifically, the part about "Image Caching", but the also the "Custom Decoding" section might help. I actually have a follow-up post in the works that highlights these two features specifically in the light of reducing memory. Just cleaning up my sample a
little and will post it there shortly.
Thanks,
Stefan Wick - Microsoft Silverlight