Inserting USB device causes computer to freeze

Make sure you have sp1 installed: http://www.usbman.com/winxpusbguide.htm

I've got SP1 and Sp2 with all other updates

Did this behave this way before you installed sp2?  There are some problems with that update.  You can also try using a powered USB hub to buffer the startup.

try callandor's hub trick first, that is very inexpensive and helps alot of times.

Or:

- This can usually be resolved by making sure that you have the latest chipset drivers from the motherboard manufacture.
- Update the BIOS of the motherboard with the latest flash from the manufacture.
- Alternatively this behavior occurs with some motherboard problems.  If possible, replace the motherboard.  If it were only one device I would not consider that, but it happens once in a while.
- You can also check the USB connection on the motherboard, where the plastic meets the main PCB.  If that is loose or wiggly, it's probably not getting good connection.

USB is a hacky little monster.  Every time you plug a USB device, the bus resets itself and Windows peeks at all available USB drivers to find the proper one(s), which is probably what is triggering the crash.  This is most likely caused by a flaky driver for some other USB device you have installed, perhaps even a device you had in the past but no longer use, though the driver will still be dormant in your system, holding its device numbers in the registry.  This is especially true for printers and cameras, as each manufacturer has dozens of different models, each with a specific set of drivers, compounded by the fact that these products live a short life and are frequently obsoleted and replaced with newer models, so the drivers often get rushed out the door unpolished and poorly tested.

I would recommend installing a new copy of Windows XP on a spare hard drive, to see if the problems persist.  Sometimes the best thing for a wacky system is a disk wipe, to get rid of all the cruft that one gathers over time.  Just like installing and removing lots of software will fill up your Windows directory with orphaned DLL files over time, installing lots of hardware will clutter your device database with broken drivers.  You can either clean them up manually (yeah, right!) or just reinstall Windows and start fresh.

Alternately, if the problems persist you may be looking at a hardware problem.  USB devices draw a small amount of 5.0v current from the bus, through the motherboard.  If the board is flaky, this small current draw might be causing a voltage drop, starving some other component on the board.  You can sometimes alleviate this kind of problem by installing a better power supply, and by better I don't mean bigger; a top-shelf Antec 330w unit will knock the pants off a No-Name 450w any day of the week.

The current draw of USB is usually negligible, but if the motherboard's power regulation circuitry is already stressed by a "dirty" power supply there might not be all that much juice available on the 5 volt line, forcing the system beyond stable power conditions.

Needless to say, investing in a quality power supply can mean $60 to $80 and there's no easy way to find out ahead of time if it's really going to solve the problem.  Also some motherboards are just flawed by design and will exhibit transient glitches no matter what you plug into them.  Try reinstalling Windows first, as that will only cost you an hour or two of your time.

Thanks for your advice everyone.  Tried  different power supply but that doesn't help.  This is the third time I've reformatted with XP pro - I've never had a problem before.  This also happened before SP2 and I've got all the updates from the manufacturer.

Did you try a powered USB hub?

You can also try this : in device manager, check the view hidden devices, and delete every USB device. Reboot and test

ignore all what they're saying
for a fast remedy
you can plug your hardware when your PC is turned off then start it
OR
try to plug your devices to the rear usb ports instead of the front one

if u want to really solve the issue
then go to your motherboard's manufactrer's website
get the latest BIOS version and install it

then everything should be ok

hammadian2 how do you like it if i say ignore what he is saying?  not very friendly ...

:)
you're right nobus
i didnt mean the bad thing anyway :)

ok, but we cannot see what you mean, you must remember all we see is what you write.

Found a possible solution that worked for others.  Make sure Universal Plug & Play is started in Services.
Start > run > services.msc