Try the following if you get this error in Visual Studio:
1. Uninstall all versions of Silverlight (not sure if this is required, but I was getting issues when I tried to install SilverLight 4)
Add/Remove Programs –> Search for Silverlight—> Uninstall
2. Install the Silverlight 4 SDK
3. Go back to visual studio and reload the project.
That resolved the issue for me.