IEGD is definitely designed to work on XP Embedded and we do not have any reports of issues with other customers like this.
If I were to wager a guess, I would say you are having a conflict either in the memory space that the driver needs to do graphics that is stolen from the platform or in the PCI address space.
Could it be that you have another errant driver that is NOT XPe friendly?
It sounds like another driver (or hardware) is conflicting with the graphics resources. Have you tried a bare-bones XPe install where you remove things like network drivers, or "unusual" drivers or boards (RAID controllers, SCSI boards, etc)? There is no hard and fast rule on how to do this so your situation will be unique to your setup.
Also, when it fails, did you build it into the XPe image or do a "setup" install then reboot? To include it in the XPe you need to be sure to follow the XPe instructions in the IEGD Users Guide carefully as there are a couple of manual steps to make it work.
Hope this helps.