I came across a rather peculiar thing with MDT 2012 Update 1 recently. MDT 2012 is pretty good at detecting when there are leftovers from previous deployments but this time it failed, and it failed hard.

LiteTouch is trying to install applications. This cannot be performed in Windows PE.
If booting from a USB Flash Disk, please remove all drives before restarting. Otherwise, ensure the hard disk is selected first in the BIOS boot order.

Oh no, I was NOT trying to install applications in WinPE :) It was a pretty plain task sequence and even recreating it with a brand new standard one did not help. However the solution was to remove the MININT and _SMSTaskSequence folders using the good old rd command with the switches /q and /s. Unfortunately I did not save the logs but the point is that if anyone hits this, there is a real easy solution.