Is it video only, no audio? Silverlight needs video+audio for Smooth streaming.
What is the key frame frequency of the live stream? You can check the logs when the stream starts, Wowza reports on key frame frequency when the "smoothstreamingpacketizer" is in the /LiveStreamPacketizers.
How does the same stream work in the Wowza Silverlight example, [install-dir]/examples/LiveVideoStreaming/SilverlightPlayer/player.html?