Windows Phone 7 - Visual Studio Project Error

Fix for Windows Phone 7 in Visual Studio 2010 with New Windows Phone project getting "An update to Silverlight is required" dialog.

The dialog looks like this:



When you download and install the update - even if you reboot - the dialog still comes up when you attempt to  create a new Windows Phone 7 Application.

The Fix:

I tried a number of fixes. None of them worked except one:

Reapply Visual Studio 2010 Service Pack 1.