This is most likely due to your graphics card not being capable of supporting shader v1.1 or better. See the link from the Microsoft XNA site below:
Supported Operating Systems: Windows Vista; Windows XP Service Pack 2
Supported on Microsoft Windows XP SP2 (all editions) and Windows Vista.
Hardware requirements are identical to those for Visual Studio 2005 plus a graphics card that supports DirectX 9.0c and Shader Model 1.1 (Shader Model 2.0 is recommended and required for some Starter Kits).
The .NET Framework version 1.1 is required if you intend to use the XACT tools for Audio Authoring.
This release requires Microsoft Visual C# 2005 Express Edition Service Pack 1 to be installed before proceeding. You can install Visual C# Express from the Visual C# Express Download Page. Visual C# Express and XNA Game Studio Express can co-exist on the same computer with other members of the Visual Studio 2005 line of products, for example Visual Studio 2005 Professional.