If possible, hook up the netbook via Ethernet and have the user logon. Unplug the cable and reboot. See if they can then logon without the rigmarole. XP should cache the credentials after logging on via the wired LAN.
Sadly it wont work, as it happens all too often, people are always coming in as they cant log on wireless...So they have to come to the office as it has a wired dock here

It's getting ridiculous now...aghhh
EDIT: Maybe its something to do with, as you say, profile caching? =/ ie when user logs off it resets something?
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