The API is designed to still be able to work with 9.3.1, so you should be good to go.
Regarding secured services, using the SL4 plugin will only be better, since you can generate tokens based on referrer, which wasn't supported by Silverlight 3.
There's also another mid-way option: You could move to Silverlight 4, but stay building using the 1.2 API. You won't get the new features in 2.0, but most of the new features are only available if you have an ArcGIS Server 10. However you will get the benefits of Silverlight 4.0 like printing, referrer support, better binding etc.