It’s because Silverlight 4 isn’t bundled with SP1 (apparently). Download Silverlight 4 tools, extract and point the SP1 error dialog to silverlight_sdk.msi. Should resolve it.
http://www.microsoft.com/downloads/en/details.aspx?FamilyID=b3deb194-ca86-4fb6-a716-b67c2604a139&displaylang=en