To create a GPO to set WPA2 settings, you must manage the GPO from Windows Server 2008, Windows Vista or Windows 7.
Attempting to edit the GPO in a lower version OS can (and in your case does) cause problems with the GPO.
See KB 917021 section on “WPA2 support in wireless Group Policy settings” for the requirements to create the GPO (best spot I have found). These requirements are also scattered through some other locations but I did not find a good authoritative source.
Wireless Client Update for Windows XP with Service Pack 2 (KB917021)
After working with Microsoft Support, I found it is a hard requirement to use Windows Vista or higher (server 2008, Windows 7) to manage WPA2 policies.
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