The project location is not fully trusted by the .NET runtime. This is usually because it is either a network share or mapped to a network share not on the local machine. If the output path is under the project location, your code will not execute as fully trusted and you may receive unexpected security exceptions.
In Windows XP SP2 you receive this error because of zone identifiers. When you download source code, it remains identified as Internet Zone. Zone Stripper is a handy tool that will remove the zone identifiers from your downloaded files.
Thanks James Kovac!