Silverlight 4 and Visual Studio.NET 2010 are awesome, however if you are required to create a Silverlight 3 application and currently are using Visual Studio.NET 2010 than the default target for your Silverlight app will be version 4. You will have to go into the Properties panel for the Silverlight app and change its target to point to SL 3.
While this is usually not an issue occasionally you may run into a deceiving error message. The project builds fine, you check the reference to the System.Windows.Interactivity assembly and it does exist, however when you go to view the XAML in the designer (either in VS or in Blend) you get the following error:
System.IO.FileNotFoundException Could not load file or assembly 'System.Windows.Interactivity, Version=18.104.22.168, Culture=neutral, PublicKeyToken=31bf3856ad364e35' or one of its dependencies. The system cannot find the file specified.
Removing the references to these assemblies will resolve the issue.