Have seen similar behavior on 2 PCs. Both were heavily infested with adware and spyware and, I think, several viruses probably downloader trojans.
If winlogon is corrupt, you cannot logon in safe mode either.
Are you getting a WinXP background screen with no icons or taskbar? If so, press Ctrl-Alt-Del to bring up task manager and run explorer through task manager. Post results.
Do the following disconnected from Internet.
If you have WinXP install CD, boot from it and run the install. When XP installation screen appears (after several minutes) see if you have option to do a REPAIR INSTALLATION. (Am not referring to recovery console). If Repair installation is option, do an overwrite install. As soon as possible after installation, boot into safe mode and run msconfig. Choose Selective Startup and uncheck Load Startup Items. Reboot, install a recent version of Ad-Aware or Spybot and remove what malware you can. Run a virus scan.
Reconnect to internet. Install other ad-ware removal program not previously installed. Update definitions and run both.
Keep running adware removal software until you get clean scans in both or they show VY Better Internet or Cool Web Search left. You may need specifig removal tools for these. Search for CWShredder, Cool Web Search removal, and Better Internet to locate removal tool (site changes).
Post back and let us know more. Hope this helps.