There is a limitation in using WCF with Silverlight when it comes to handing errors during method calls. Receiving SOAP faults is not supported in Silverlight 2.
Silverlight "doesn't know what to do" with System.ServiceModel.FaultException. If it did, we could pass the exception object back and the client could work with a typed object.
The solution is to create our own object and pass it back. I've read about this being done as a serializable object with limited data, or as an out parameter in the WCF service methods, or even as a field of the custom type in a domain object.
Here are some links to that information:
http://www.atrevido.net/blog/CommentView,guid,ffa70c25-0c78-474b-8d60-10a693ffc407.aspx
http://silverlight.net/forums/t/18885.aspx
http://silverlight.net/forums/p/17944/60019.aspx#60019