If you are trying to deploy a Silverlight 3.0 application and get the following error message:
Message: Unhandled Error in Silverlight Application
Code: 2104
Category: InitializeError
Message: Could not download the Silverlight application. Check web server settings

Then you need to update the MIME types in IIS. Below is an example of what you need to do for IIS6.0. Click MIME types first:

Click New and make sure you screen looks like the following:
Extension : .xap
MIME type: application/x-silverlight-app

You screen should look like the following:

If everything else is setup properly, then you will no longer get that error message!