There are a number of possible reasons for this error. Essentially, the car is not reading the USB memory stick correctly.
1) Make sure NO other USB sticks or SD Cards are installed in the car - if you have OEM navigation remove the Nav SD Card.
2) Reboot the CMU by pressing the MUTE, NAV & BACK buttons together for about 20 seconds until the screen turns off and on again.
3) Copy the contents of the "Step1-RecoveryTools" folder to a different, newly formatted (FAT32) USB memory stick.