When WINICE.EXE is loaded, it hangs at the second WINDOWS logo on a 486 system. If any keyboard LED (such as CAPSLOCK) is set on before WINICE is loaded, it is off when the system hangs. Also can happen when single stepping with F8 key.
Add the command "NOLEDS" on a separate line in WINICE.DAT. This fixes a problem caused an interrupt from the keyboard LED's.