Yes, there was a problem with the original "KB908531" update. It caused a number of problems with computers that had HP camera and scanner "Share to Web" software installed...as well as with NVidia graphics cards.. A new release of the update fixed the problem for most users. See the link below for the Microsoft KB article and Security Bulletin about it:
Have you tried installing the "newest" version of the update?
In my case, I added the registry edits that were provided by Microsoft in the KB article below:
Because of the error message you have received, I advise running a full scan using "Error Checking/Chkdsk" procedures from the link below. It should correct any corrupted files that might still exist.:
How To Run 'Error Checking/Chkdsk' On Win2000/XP
Hope this helps.
When I updated my IBM x31 laptop (WinXP SP2)with KB908531, during restart get lsass.exe - The applciation failed to initialize properly error message. Then screen goes black - cannot restart in safe mode with or without networking, cannot revert to last know good setup.
Have then done a windows repair install - gotten back in run Spybot S&D, WindowsDefender, Avast 4.7 Home edition, Microsoft Malicious Software Removal Tool - FOUND NOTHING.
Do not use HP devices - this machine had the drive formatted with a one-pass zero then Win XP SP2 OS installed - that is all.