You may have heard about the recent Silverlight 1.1 alpha refresh to the original Silverlight alpha released at Mix'07. The Alpha Refresh does break the mix'07 Visual Studio templates, so you need to get an updated tools stack in order to fix the problem.
For your Visual Studio Silverlight projects to work, you need to upgrade both (1) the Silverlight runtime and (2) the Visual Studio Silverlight debug pack. It's easy to forget #2. (See "why is there a separate 'debug pack' for Silverlight")
I'm definitely not a expert at getting setups right. FWIW, Here are the steps I took to get things working again:
I'm usually a magnet for setup/uninstall problems. Things went pretty smooth for me with just a hiccup around step #6. Check out the Silverlight forums if you run into problems.