The error occurs with newer versions of the ISE tools used along with the CoolRunner-II Utility that is provided by Digilent with the board.
The CoolRunner-II Utility requires that the ISE software environment variable is set correctly.
For example:
XILINX=C:\Xilinx\12.4\ISE_DS\ISE\
When the enviroment is set correctly, the Digilent CoolRunner-II is able to program the board correctly.
For further information on setting the ISE software environment variable, see
(Xilinx Answer 11630).