When you publish your MXD to ArcGIS Server you get to pick betweem JPEG, GIF and PNG. GIF is not supported by Silverlight. Choose PNG or JPEG based on the type of data you have. JPEG compresses imagery really well, but is poor for line graphics like topographical maps, which PNG is better at compressing. JPG doesn't support pixel transparency either, so that might also be an issue if your map is not used as a baselayer.