I am running Visual Studio 2008 Version 9.0.30729.1 SP with .NET 3.5 SP 1 under Windows XP Pro Version 2002 SP 3 with an Intel Core 2 Duo E8400 3 GHz processor.
I am
I wonder if FIPS compliance checking is turned on on your machine. Here is a post that I had written a while back that talks about turning it off and why you might be getting this error messages. Basically FIPS is a US federal government standard for security and encryption. Based on it, some encryption algorithms will not run on your machine, if your machine is running in FIPS compliance mode. Easy fix in that case is to turn off FIPS compliance checking. The right fix is to pick the correct encryption algorithm.
Here is my post: http://blog.aggregatedintelligence.com/2007/10/fips-validated-cryptographic-algorithms.html and this one: http://blog.aggregatedintelligence.com/2009/08/cryptographic-algorithms-and-net.html