When I tried to run a my Silverlight App on IIS7 I got the following error:
Microsoft JScript runtime error: Sys.InvalidOperationException: InitializeError error #2104 in control 'Xaml1': Could not download the Silverlight application. Check web server settings
The solution for this problem is adding .XAP file extension to your IIS MIME Types. The MIME type is application/x-silverlight-app.
If you don't know what a MIME Type is read this post.