It sounds like the old corrupt profile issue. I won't write at length about this but to sum it up and supply how to get the files out. You already figured out most of the needed steps.

Google XP CORRUPT PROFILE (yes I know it's vista here). Now look at Microsoft's fix for that issue. At no point and in no article was any offer made to fix the old account. All answers are to create a new account and get the user's files out.

Hope this helps you get it done.