Iím experiencing the exact same problems on my site, there are a few slight differences in our setup which might shed some light on things.
We have one site, 4 DCís, 2 w2k and 2 w2k3, the w2k DC are about to be demoted. Weíre a w2k pro shop with around 250 workstations, up until now that is. I have just configured 2 WinXP SP1 workstations for myself and a colleague so we can run the w2k3 server tools. Both workstations are experiencing the problem of random hanging at the applying your personnel setting stage. If you leave the workstation it will eventually login, after an hour or so, and give the 1217 error in the event log.
The problem ONLY happens with WinXP SP1 clients. We use a number of group policies and run with Always wait for the network at computer startup and logon setting enabled as to is the Run logon scripts synchronously setting.
I would say the problem occurs 1 out of 5 logons, making it a pain to troubleshoot. Restarting the PC and logging back in under the same ID doesnít work, restarting in Safemode with networking and logging in seems to clear the problem. Kix32.exe is run locally and I have just upgraded to the latest version.