This is a real pain. The Malware that has entered your system has either replaced your startup files, or changed the registry to look to their startup file. Here are the two solutions. I have systems with this and not had to rebuild the PC.
1. REPLACE THE STARTUP FILE
Boot using your Windows XP CD Rom.
Enter the recovery console and at the command prompt goto the folder:
C:\WINDOWS\SYSTEM32
Type DIR *.exe and if you find it type:
COPY USERINIT.EXE WASAUPDATER.EXE
Exit and reboot normally. You should now be able to logon if you cannot, then it may be solution 2.
2. CHANGING THE REGISTRY TO WHAT IT SHOULD BE
Boot user ERD (emergency recovery disc, available online) and then run REGEDIT tool.
Look for HKEY_LOCAL_MACHING\SOFTWARE\Microsoft\Windows NT\CurrentVersion\Winlogon\
In the right pane you should see
C:\WINDOWS\SYSTEM32\WSUPDATER.EXE or maybe something different! Make it read:
C:\WINDOWS\SYSTEM32\USERINIT.EXE |