I spend the better part of two days struggling with this and a number of other error conditions surrounding menu creation. Thumbnails didn't match the templates, got C0040004 errors, hangs, and other various failures to burn a disk image (not even to the DVD drive!).
Numerous uninstalls registry cleanings, file system cleanings (removed powerdirector folder, temp files, hidden local settings files for current and All users).
Nothing helped.
Until I re-installed Windows Media Player 10.
Then live was happy again and all the bizzarre symptoms dis-appeared.