Additionally, if AdAware has been run on the machine, as the result of removing one particular piece of spyware, it can cause this behavior.
Boot with the XP CD (assuming you have a retail version, and not an OEM "Recovery" CD). Begin Setup. You'll be given the option to Repair an existing installation. Select this option. This takes you into Recovery Console. You'll be prompted for the Administrator password. If there is a password on this account, you will need to remember it. This is not the password for any "administrator" level account, it is the password for THE Administrator account.
Once in the Recovery Console, enter the following commands:
CD System32
COPY USERINIT.EXE WSAUPDATER.EXE
Reboot the computer. You should now be able to log on. Once you have, click Start, run and enter REGEDIT Go to:
HKEY_LOCAL_MACHINE\SOFTWARE\Microsoft\Windows NT\CurrentVersion\Winlogon
Look in the right pane for the Userinit value. Double click the Userinit value and change it to C:\Windows\System32\userinit.exe, The comma on the end is intentional, and it must be there. Now, if desired, you can delete the WSAUPDATER.EXE copy that you created.
http://www.lavahelp.com/articles/v6/04/06/0901.html
Unable to Log On To Windows XP After Removing wsaupdater.exe
