This is often caused by Visual Studio setting the Silverlight App as the current project (and then it uses a temporary .html page to show the Silverlight app). The problem is that this way its using a FILE protocol which isn't allowed for downloading video. To make sure this is the case, test in VS and check the URL that is being launched, if it doesn;t start with http, then its the FILE based protocol.
To fix this, make sure the Web Project is the active startup application in VS.
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Shawn Wildermuth
C# MVP, MCSD, Speaker and Author
Silverlight 2 Workshop
May 12-14, 2008 - Atlanta, GA
May 28-30, 2008 - San Francisco, CA
http://www.silverlight-tour.com