Cache Needs Decryption error

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This error occurs when you try to run the SDK without having ever launched Half-Life 2.

To fix this error:

  1. Run Half-Life 2 from Steam's Play Games window.
  2. Run the Source SDK from Steam's Play Games window.
  3. If the problem is not resolved, repeat these steps running Counter-Strike: Source and Half-Life 2: Deathmatch.

Running these applications causes them to validate and repair any cache problems they may have.