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Okay I had the same problem and now I've figured it out.

Chrisredfield posted on Tuesday, September 16, 2008 7:07 PM

Okay I had the same problem and now I've figured it out.  If you have an ATI
Radeon video card and are not using the latest video driver out there, you
will not be able to use Remote Desktop Connection to connect to the system
with the ATI.  Apparently there was a bug fix that came out and disallowed
any Terminal Servcies connection to take place.  A simple fix my Higher Ed
institution's I.T. department (me) had was to go into Display Properties,
Settings, Advanced, and in Troubleshoot, drag the Hardware Acceleration
slider to None.  This is allow you to remote in.  Otherwise update your video
driver to the latest one.  I must have spent hours trying to figure this one
out today and even thought it was because Service Pack 3 wasn't on here.
Nope.  Well, at least Windows XP is fully updated now!

There may be other video cards out there with similar issues.  Our campus
Dells are all with the same card so we just had to include it in our weekend
Sunday night updates.  Anyway, thanks for reminding me.  When I saw this
thread I hit myself on the head.