Jeff,
Okay, now I am really confused!
Here are the steps I think I took place:
1)In my first Silverlight app, I used a gif file
This caused my 4001 error (I just confirmed this)
2) The code I posted showed I was using a png file, and I swear I tried that before my first post.
3) Then still using the png file, I tried Cass's recommentation (based on his assumption that I using 1.1, not 1.0) of adding the assembly references. After I few dozen more tries I went back to using my gif file. And then followed a few more back and forth posts.
4) While cleaning up my project to send you, I removed the the references, and punt the png file back in, bacause that is what you said you tested with.
5) Voila! All is working! Talk about wasting 4-5 hours!
We definitely need to put in big red letters somewhere that you cannot import gifs onto your canvas. Within Blend there is a question mark over the gif icon, but when you add the gif to the canvas it allows you to preview it.?!?!
Happy Thanksgiving!