Let me give you more background information. I currently have this app running in production on another Amazon EC2 instance that is running ArcGIS 10.0 SP2. This current instance is a staging server that will replace the one in production- this instance is running AGS10.1 SP1. The silverlight app was running at some point. I dont know if it stopped running after I applied SP1 or after I tried to implement token security, which I have backed out the settings completely. I reset the services to be wide-open to public users just so I could troubleshoot this issue.
However, I will check the mimes once again, and the configuration as Phoebe as suggested.