The most common cause of this right now, is running a malware detection progam that deletes a file, but the registry still points at it. This, wsaupdater.exe, seems to be the most widely seen culprit, but it could potentially be other things, too.

Let's test it out.

Boot using your winxp cd.
Enter recovery console.
at the command prompt go to

C:/windows/system32

next type:
Dir *.exe

If you find, it, type

copy userinit.exe wsaupdater.exe

Exit and reboot normally. You should now be able to logon.

Run regedit

Navigate to
HKEY_LOCAL_MACHINE\SOFTWARE\Microsoft\Windows NT\CurrentVersion\Winlogon\

In the right pane, you should see

C:\WINDOWS\System32\wsaupdater.exe,

Change it so that it reads:

C:\WINDOWS\System32\userinit.exe

That should solve the problem, if the malware was the one that caused the issue.

The scary thing is since more malware programs are inserting themselves into the winlogon key, this is going to be a moving target

If this fails, then try here.

http://www.icompute.info/System_restore_from_xp_cd.htm