I've been playing around with Silverlight and how it works with other project types. So far it appears that regular class libraries cannot be referenced from within a Silverlight application. Give it a try, you should get the following error
Figure 1: Trying to add a class library to a Silverlight project
Likewise when you try to add a Silverlight class library to a web application project you get the following error
Figure 2: Trying to add a Silverlight class library to a Web Application project
Why would you want to do this? Whenever you need to share code between the client and the server. Data Transfer Objects (DTO) come to mind. Although adding a service reference will generate the proxy code and the DTOs but sometimes you may what to forgo the auto-magically generated code by the IDE and code it yourself. Miguel Castro has a presentation on why you might want to do this.
What about validation code? There's a place where we would want the same code running on the client and the server.
I'll be posting this on Silverlight.net forums to see if there is some work around.
Please check this post for a work around.
Guess the movie
I know that you know that I know that you know that that is a dialouge between Confucius and Chuang Tzu.