If you are running VS2012 read http://support.microsoft.com/kb/2745294 It worked for me.
Summary of the information here is:
With Visual Studio 2012, Entity Framework now creates 'DbContext' based context classes by default, but WCF RIA Services does not support 'DbContext' based context classes.
In order to utilize your Entity Framework model with WCF RIA Services, you must convert it to an 'ObjectContext' based model. This can be done using the following steps:
Open your entity model in the designer, change the "Code Generation Strategy" from "None" to "Default"
Delete the two ".tt" files that are adjacent to the model
Rebuild the project
After following those steps, you will be able to select your entity model's context class in the 'Available context classes' list. The side-effect of this procedure is that you have now converted your entity model from an Entity Framework DbContext-based model to an ObjectContext-based model.