I found this topic on the old read only forum(http://www.arduino.cc/cgi-bin/yabb2/YaBB.pl?num=1228502992). I found a solution, this was a pain for me, so hopefully this help others. I have Win XP SP3. As was mentioned in the referenced post, it is a problem with the wrong driver being installed. By default windows will install the AVRISP mkII with the Jungo drivers. You will see it listed under Jungo in the Device Manager. To fix, you need to update the driver associated with AVRISP mkII
Update Driver->Let windows search for driver->No->Install from a specific location->Don't search->I will choose driver to install-> arduino-1.0.1\hardware\tools\avr\utils\libusb\bin.
After the install, the Device Manager will have a new listing for LibUSB-Win32 Devices, underneath it will have an entry for AVRISP mkII.