It would be easier to simulate the embers of a fire rather than the fire itself. Embers are normally stationary but gradually change their color as they either burn hotter or cool down.

Maybe a modified version of a flood-fill algorithm would be able to cling to the edges of an expanding area (not necessarily circular) region.

I think this would be much easier if you could use a palettized color system. It would be quite a hard thing to achieve in .net because of its penchant for BPP color systems.

I shall think about this and get back soon if I think of something. "Challenge" is the right word

It may be easier to use a pre-rendered animation for this effect. It would certainly take up a huge amount of cpu time and would be difficult to ensure its smoothness.

Hmmm.