Microsoft do not support flv format at all - it is written in the article:
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Silverlight 3 won't be able to play .flv or .swf content, said Sklepowich. But it will be able to play H.264-based .f4v content.
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I assume you should convert your videos by to Silverlight compatible format in order to use Silverlight. Searching on internet there appears to be manny converters that do this job. You can try different converters until you find the one that suits you. We do not plan to write our home grown converter and this moment.
the Telerik team