helped me to resolve the issue (to restore working profile for the user) method #1.
I found out that someone had deleted the "Default User" folder out of the "Documents and Settings" folder, so when a new user tried to login for the first time this error message appeared. I just copied the folder from another computer and the problem was solved.
I had this problem with a user who had changed security permissions on his folder under Documents and Settings. He had removed everything bar his domain account, which caused problems for Windows.
Re-applying the normal System settings fixed the problem.
You experience this problem if many users are logged on to the terminal server. See ME935649
to resolve it.
I had the same error message with local and domain users. The problem was that the user had deleted the default folder in the documents and settings folder. Replacing the folder from a similar PC solved the problem. Be sure to hide the folder and remove the users admin rights so they can't delete the folder again.
It appears this event is related to EventID 1508 from source Userenv. Look up EventID 1508, in my case once the “.dat” files were deleted and the system was restarted this error went away.
From a newsgroup post: "Boot into Safe Mode and log on using the Administrator account. Rename the "UsrClass.dat" file to "UsrClass.old" found in the following folder: "C:\Documents and Settings\<user account>\local settings\application data\Microsoft\windows", where <user account> is the name of the account which has the problem. Restart your computer in Normal Mode and then log on the computer using your account".