In the documentation and change documents in Silverlight 2 Beta 2, they mention that the format of the Deep Zoom files have changed from a binary to an XML file. In fact, then mention that the file is called .DZI for a single image, and .DZC for an image collection.
Unfortunatley the DeepZoom Composer people didn’t get the story. When they create the images for you, they create DZI_OUTPUT.XML or DZC_OUTPUT.XML as the file that you should be pointing at. You can manually change these to .dzi or .dzc if you like (I would as I expect this is just a bug).
You can test this by creating a Silverlight Wrapper from DeepZoom Composer when you output your files and see that the URI they are specifying is the *_OUTPUT.XML file.