See http://support.microsoft.com/kb/312629/EN-US/
I am using reponse.direct in my app as well and I am not getting the exception. The workaround that the knowledge base article suggests (Server.Execute) does not work for me. I am getting lots of javascript exceptions from the Ajax Toolkit on the target page if I use Server.Execute, and I did not dig into the cause.
My question - what arguments do you see against just swallowing the exception as a 'known limitation' and moving on?
My reason for using Server.Transfer in this one very specific case is that I want to mask the (real) target url of the page that is actually executing. It works pretty well, except for this exception (that the user never sees).