From a support forum:
In my case, I had an SCCM 2007 primary site server, with (currently) 5 secondary sites. The WDS service (and therefore the PXE Service Points) on all the secondary sites was working fine, however at some point I started to see this event and on several of the servers, the WDS Service won't start.
The issue was caused be the binary differential replication and it was killing the WDS service. I recompiled the boot image, and updated the distribution points (with binary differential replication turned on), and the issue kept occurring. Using the same image without further modification, I manually cleared the PXE distribution point and the compressed version of the image, then disabled binary differential replication. I redistributed the same image without a problem. To be sure, I repeated the process, except I enabled binary diff replication, and the problem returned - killing the WDS service.
Disabling binary differential replication once again, and the problem was resolved. Being boot images which aren't updated too often, I am happy to leave binary differential replication turned off for this package. I know WDS is sensitive to issues, and this may be just one of those cases.