I had some troubles debugging Flex 2 since I installed some updates for CS3 suite.
The error show it cannot use this file:
C:\Windows\System32\Macromed\Flash\Flash9d.ocx
But you can fix this if you download and install the files from:
http://www.adobe.com/support/flashplayer/downloads.html#fp9
in the part: Adobe Flash Player 9 — Debugger Versions (aka debug players or content debuggers) for Flex and Flash Developers