It used to make my brain hurt too.
I figured out for my use I needed this file:
<?xml version="1.0" encoding="utf-8"?>
<access-policy>
<cross-domain-access>
<policy>
<allow-from http-request-headers="SOAPAction">
<domain uri="*"/>
</allow-from>
<grant-to>
<resource path="/" include-subpaths="true"/>
</grant-to>
</policy>
</cross-domain-access>
</access-policy>
named clientaccesspolicy.xml
The trick is that is has to be at the root of your web server. That being said you need to be able to browse the file. In your case located at:
http://localhost:8732/clientaccesspolicy.xml
If you cannot see the file silverlight will always complain and boy does it complain whenever it can!
I should point out that my policy file is not restrictive, so use it wisely.