Just thought I'd contribute my experience. I started getting the "USB Device has malfunctioned" error only after I started using the Airlink101 802.11G USB adapter. However when the error occurred, only one of my USB devices is affected: my Microsoft USB optical mouse. Luckily I could still browse the internet using my keyboard. I typed the error message into Google and was lead here. I tried adding the HKLM\SYSTEM\CurrentControlSet\Services\USB key and DisableSelectiveSuspend DWORD to no avail. What did seem to work is shutting down the PC and unplugging my power supply unit (Antec NEOHE 550w) for a few seconds. Plugged it back in and voila, the mouse works again. I think I'm going to leave that registry key in there even though it seems it didn't help. Here are my system specs:
Abit AW8-D Intel 975x chipset with current chipset drivers from Intel.com
Pentium D 3.0ghz
MSI Radeon x1900xt 512mb running custom Omega 3.8.360 drivers
1gb RAM
300gb SATA
Airlink101 AWLL3026 802.11G adapter with up-to-date "bare" drivers from their website (they have another set of drivers that includes a configuration utility but I prefer to use Windows to set it up so it automatically connects after I log in)
Microsoft Optical USB Mouse (this is the device that Windows was saying malfunctioned)