I have experienced a similar situation today which cannot be fixed by system restore of Vista.
I can launch the notebook in safe mode and my problem is caused by defective anti-virus software (Symantec Endpoint in my case).
The fix is to do a chkdsk /r in windows recovery environment, disable the service in relation to the anti-virus software in safe mode, start again in normal mode and remove anti-virus software and install anti-virus software again.
So, I guess that windows update has crashed with anti-virus software and has corrupted the user profile afterwards.