Here's a step by step that should do the trick without any data loss:
Get a Bootable Windows Install CD, boot it.
Let it load, and begin the setup. Don't go into the Recovery Console, don't go into the first "Repair" option because it just takes you into the Recovery Console. The second time it asks you to Repair the installation, do it.
It will copy a bunch of files and reboot. As it begins to install everything it will stop to ask you for some setup options, and your product key. Don't bother with that just yet, but press and hold Shift+F10. The DOS window will pop up instantly. You'll have full Administrative rights to the hard drive.
Type "control userpasswords2" into the console screen, and press enter. An advanced user screen will pop up with the option to "reset" any passwords.
That user is obviously acting funky, so lets not waste effort reseting that password another time -- this can take a lot of time and you want to do it right the first time.
Instead, create a new user, with a new password.
After that, get out of that screen, answer the questions, and resume the install to see if it works.
If this doesn't work, then it's safe to say that you have some sort of hardware issue, and even a low-level format won't solve your problem. Try installing some new RAM, another hard-drive, and a non-DVD-ROM drive one at a time to see if the issue (or another data issue) persists.
I say RAM because the installation may have been corrupted due to faulty data being pulled through the memory. I say a hard-drive because the current drive may be failing. Also, if you're using a DVD-ROM to install then there may be read errors even if your copy is a DVD itself.
Good luck, and keep us posted.
