Before you start, you need to get the Microsoft.Phone.Media.Extended.dll and GAC it. For more information on this, read this and this!

Let’s Start

Create a new Windows Phone application, add the Microsoft.Phone.Media.Extended.dll reference and add the ID_CAP_CAMERA capability to the WMAppManifest.xml.

<?xml version="1.0" encoding="utf-8"?>

<Deployment xmlns="http://schemas.microsoft.com/windowsphone/2009/deployment" 
    AppPlatformVersion="7.0">
  <App xmlns="" ProductID="{56a0189a-5739-410b-a400-d70214739c88}" 
      Title="WindowsPhoneApplication1" RuntimeType="Silverlight" 
      Version="1.0.0.0" Genre="apps.normal"  
      Author="WindowsPhoneApplication1 author" Description="Sample description" 
      Publisher="WindowsPhoneApplication1">
    <IconPath IsRelative="true" 
        IsResource="false">ApplicationIcon.png</IconPath>
    <Capabilities>
      <Capability Name="ID_CAP_CAMERA" />
      <Capability Name="ID_CAP_GAMERSERVICES"/>
      <Capability Name="ID_CAP_IDENTITY_DEVICE"/>
      <Capability Name="ID_CAP_IDENTITY_USER"/>
      <Capability Name="ID_CAP_LOCATION"/>
      <Capability Name="ID_CAP_MEDIALIB"/>
      <Capability Name="ID_CAP_MICROPHONE"/>
      <Capability Name="ID_CAP_NETWORKING"/>
      <Capability Name="ID_CAP_PHONEDIALER"/>
      <Capability Name="ID_CAP_PUSH_NOTIFICATION"/>
      <Capability Name="ID_CAP_SENSORS"/>
      <Capability Name="ID_CAP_WEBBROWSERCOMPONENT"/>
    </Capabilities>
    <Tasks>
      <DefaultTask  Name ="_default" NavigationPage="MainPage.xaml"/>
    </Tasks>
    <Tokens>
      <PrimaryToken TokenID="WindowsPhoneApplication1Token" TaskName="_default">
        <TemplateType5>
          <BackgroundImageURI IsRelative="true" 
              IsResource="false">Background.png</BackgroundImageURI>
          <Count>0</Count>
          <Title>WindowsPhoneApplication1</Title>
        </TemplateType5>
      </PrimaryToken>
    </Tokens>
  </App>
</Deployment>

In our main window, we need to add a CameraVisualizer

<phone:PhoneApplicationPage 
    x:Class="WindowsPhoneApplication1.MainPage"
    xmlns="http://schemas.microsoft.com/winfx/2006/xaml/presentation"
    xmlns:x="http://schemas.microsoft.com/winfx/2006/xaml"
    xmlns:phone="clr-namespace:Microsoft.Phone.Controls;assembly=Microsoft.Phone"
    xmlns:shell="clr-namespace:Microsoft.Phone.Shell;assembly=Microsoft.Phone"
    xmlns:d="http://schemas.microsoft.com/expression/blend/2008"
    xmlns:mc="http://schemas.openxmlformats.org/markup-compatibility/2006"
    xmlns:media="clr-namespace:Microsoft.Phone;assembly=Microsoft.Phone.Media.Extended"
    mc:Ignorable="d" d:DesignWidth="480" d:DesignHeight="768"
    FontFamily="{StaticResource PhoneFontFamilyNormal}"
    FontSize="{StaticResource PhoneFontSizeNormal}"
    Foreground="{StaticResource PhoneForegroundBrush}"
    SupportedOrientations="Portrait" Orientation="Portrait"
    shell:SystemTray.IsVisible="True">

    <Grid x:Name="LayoutRoot" Background="Transparent">
        <media:CameraVisualizer x:Name="cameraVisualizer" />
    </Grid>
    
</phone:PhoneApplicationPage>

This is used to show the actual images captured from the camera. Next, setup the camera

VideoCamera camera = new VideoCamera();
cameraVisualizer.SetSource(camera);

And that is it!

NOTE: Do not run this in the emulator... It will crash!!!

Is their any practical uses for this? Sure, Kevin Marshall (from Clarity consulting) has a excellent demo of this being used for reading barcodes and for augmented reality!

This is a MUST READ article....

Hacking the WP7 Camera (The basics)