I have such problems with the AVRJTAGUSB and an ATMEGA16.
The Hardware is only the controller with the JTAG connector and a crystal.
I can load and start the software and it runs correctly.
I can set breakpoints, the debugger stops, everything is ok.
But after six singlesteps I got a errormessage: Reading the program counter, an invalid value (0x7FFFFFFF) was recieved from device.
I have to disconnect the USB and the power of the target, sometimes I have to restart the AVRStudio. This error is on two PCs (2000 and XP) and with different targets. I tried different baud rates.