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.
I'm using Vista home service pack 2. I'm getting errors when trying to logon to user account. I set up a new user account to work so I could get things done. Here's the odd thing. I thought that the old user account was corrupt, but I tried and I was able to get into that account in safe mode. Does this mean that it's not really corrupt? Can someone please help me to get it to work in normal mode?
Thanks in advance...Phil