I was going to say that it sounded like either a DLL-deleting virus or a corrupt registry. (Registry == double-plus-ungood. One corrupt file and your entire system is basically incapacitated. INI == good. One corrupt file and only one program is incapacitated.) Still, with Windows XP, that shouldn't be POSSIBLE without, well, a shitload of work. (From what I've heard, there are (supposed to be) lots of safeguards in XP to prevent just this.)
That said, I remember something similar to this happening on one of my old Windows 9x box (though the similarities are sketchy at best). I got errors every startup about all my files and directories (including executables) in C:\ being unable to execute. (Or maybe they weren't found. I can't remember...but it doesn't matter, especially since they were there.) In any case, one day, the errors suddenly stopped. (Then picked up again a few months later.) *shrug* Just felt like sharing that story. Probably koz it's 12:49, I've got a final tomorrow, and I'm not at all ready for it, but I'm not studying. (Summer school blows.)