Breaking change to font embedding for Silverlight 2 RC0
All fonts embedded in the XAP file must now of of type Resource.
You can then specify the FontFamily as simply the name of the font file followed by the font name, separated by the pound sign, like this:
<TextBlock Text="Testing..." FontFamily="impact.ttf#Impact" FontSize="40"/>
From what I understand this change was made to bring it in line with WPF and to make it so that the font file isn't loosely packaged in the XAP to protect the font file slightly more.