We also had the same problem. It appears that the issue has to do with a
specific version of the usb driver, usbstor.sys. The answer is to remove the
"USB Boot Mass Storage Device" component from Target Designer and rebuild
(you will also have to remove any components that depend on this component).
I should point out that after we rebuilt with the component removed, we
copied the new usbstor.sys driver file over to the system32 folder on our
target machine that was having the problem. The problem was fixed, so this
verifies that the usbstor.sys was definitely causing the problem.
usbstor.sys version 5.1.2600.2996 does not work, version 5.1.2600.2180 works.
Also, we found this solution at:
http://forums.microsoft.com/EmbeddedWindows/ShowPost.aspx?PostID=1784036&SiteID=47