I am working on a project which uses Entity Framework 4.1 for persisting our various objects to the database (code first).
I am testing in Visual Studio with a local
The error you see means that the model hash stored in EdmMetadata table is different from the model hash computed from the model in the application. Because you are running database creation from a different application (your dev. application) it is possible that those two differ. Simple advice here is: don't use different applications for database creation and instead let your main application create the database (either automatically or for example with some admin interface).
As another option you should be able to turn off this check completely by removing the convention responsible for these checks:
modelBuilder.Conventions.Remove();
Model hash computation is dependent on current entities in your application (any simple change result in different model hash) and on database server versions / manifest. For example a model deployed on SQL server 2005 and 2008 will have different model hash (Express vs. Full or 2008 vs. 2008 R2 should not result in different model hash).