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A few folks mentioned this one (Jen, Mike G)..... In 9.2 we can now snap to features when using the Measure Tool (this feature was a long time coming!) However, you can sometimes get the error message when snapping on a measure.
This is because, when snapping on a measure is enabled, ArcMap builds an internal cache of "snap points" (Vertices, etc.) If there are too many of these on the screen, the program can raise this error.
Unfortunately the only solution seems to be to zoom in closer, to reduce the number of snap points, and try again. I checked Advanced ArcMap settings, and the forums and did not come up with much else of a solution
Forum reference: