This error code is usually associated with a timeout error. Are you using the IMAQ for USB driver fron NI's website, linked here? This driver will only work with cameras that are compatible with DirectShow, do you know if your camera is compatible with this format?
You might want to eliminate the general error handler dialog box. That is what is causing the dialog box to pop up on every iteration. Even though you clear the error, it is not being cleared until after the dialog box pops up.
Just kill the general error handler and execute the clear error VI. You don't even need the unbundle of the error cluster and the case structer to clear the error. I believe that is even wired wrong, as you are telling it to clear the error when the error cluster is false. And false means there is no error.