The subject behavior will occur if you have a failed SP2 (Service Pack 2) installation, where the file system contains pre-SP2 files, but the registry indicates that SP2 is installed. When this occurs, Windows Update or Automatic Updates offered the SP2 version of MS04-038, which updated some files to post-SP2, causing a dynamic link library mismatch.
To recover from this problem:
01. Log on with administrative privileges. If you cannot log on, try starting in Safe Mode.
02. Ignore any error messages.
03. Open Task Manager by pressing CTRL+SHIFT+ESC.
04. Press New Task (Run) on the File menu.
05. Type %SystemRoot%\$NtUninstallKB834707$\spuninst\spuninst.exe into the Open box and press OK.
06. After the restart, open Task Manager by pressing CTRL+SHIFT+ESC.
07. Press New Task (Run) on the File menu.
08. Type %SystemRoot%\$NtServicePackUninstall$\spuninst\spuninst.exe into the Open box and press OK.
09. After the restart, re-install SP2. See http://www.microsoft.com/sp2install/.
NOTE: If you are unable to complete any of the above, perform an in-place upgrade of Windows XP, and then install SP2.
10. After the restart, use Windows Update to install the critical updates.
NOTE: To determine if your computer is in an incomplete SP2 state:
1. Start / Search / All Files and Folders.
2. Type %SystemRoot%\system32\lsass.exe and press Search.
3. Right-click the Lsass.exe file, which may appear without an extension, and press Properties.
4. Select the Version tab.
5. If the version is earlier than 5.1.2600.2096 and Windows Service Pack 2 exists in the Control Panel / Add or Remove Programs applet, you have an incomplete SP2 installation.