If you're using VS2003 can you please check the properties on licenses.licx, make sure the build action is 'embedded resource'. *very important*!
I think Dan may also have been on to something -- VS2003 may be calling the wrong version of lc.exe. What I know about embedded resources suggests that resources created by .NET 1.1 are not compatible with .NET 2.0 (I see this sometimes in Packager), so maybe the issue is that lc.exe simply doesn't understand the automatically-generated resource created by VS2003.
Can you please check this registry value:
This should point out the location of lc.exe to VS2003 (append 'Bin' to that path). Maybe this is set to an invalid file path and/or lc.exe is missing or damaged.