This was the basis of an excellent entry [0] in the 2007 Underhanded C Contest. It had a correct implementation of the RC4 encryption algorithm, except it used the XOR swap, so on average one byte of the pseudorandom state was zeroed every 256 iterations. Eventually, the state is all zeroes, and the encryption just outputs pure plaintext. Best of all, the first few kilobytes of output looks random at first glance.

[0] http://www.underhanded-c.org/_page_id_16.html