If you ever want to add a service reference to your Windows Phone 7 app, and fail with a message like:
Custom tool warning: No endpoints compatible with Silverlight 3 were found.

Please remember the following 2 simple actions to finally get your reference:

1) Silverlight only supports basicHttpBinding (default: wsHttpBinding) -> so change it in the web.config file

2) close your Visual Studio & reopen it again.

Now try to update your reference: ét voilà!
This worked for me. Bonne chance!