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Since I found this forum while looking for a similar solution on Windows XP Home, I decided to post a separate solution.
Problem: You cannot remove a user account because the directory (folder) for which that user is associated (in the C:/Documents and Settings/*) because the folder is either missing or corrupted.
Solution:
Click on Start
Click on Run
Type "control userpasswords2" and click OK
Select the user account you wish to remove
Click on the "Remove" button.
Basically, it's a form that most WinXP Pro and Win2000 administrators are used to seeing, but in XP Home it's harder to get to.
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