You can do both actually.
Scenario 1: check out http://www.microsoft.com/silverlight/halo3.aspx. The application (xaml, js, ...) and all its media assets (videos, images, text, etc.) are hosted in SLS and instantiated within an iframe on the page of the web site. If you do that, you can reference your videos the standard way in your player, and upload everything to SLS when you're done.
Scenario 2: check out http://halo3.msn.com/videos.aspx. The application is hosted on the msn.com web server, but the media assets (large video files, encoded at 700 kbps for the low res, and 2 Mbps for the high res) are all coming from SLS. To do that, check out http://dev.live.com/silverlight/initparams.aspx. You have to pass a URL constructed as streaming:/account_ID/fileSet/fileName to initParams of your player, and this will be converted to a http:// URL consumable by your media element.
There is no http endpoint to files hosted in SLS at this point in time.