I'm bumping this thread because I recently had the same problem occur.
I was playing fine and all of a sudden nothing happened.
At first it said No Controller. It doesn't anymore but nothing happens still.
I updated the .rdb files as mentioned above but it did not fix the problem.
The only other ROM I have is Banjo Kazooie and that has no problems.
I am using the 360 Controller. I have tried that and my keyboard and neither have worked with Banjo Tooie.