Hello centerv,
I've tried every trick in the book and have found nothing but roadblocks and solutions that were intended for Vista. Since everyone seems to be blaming a Microsoft update, I will concur that this is most probably the case: an update that got messed up by some other application pre-existing in the computer.
I don't have the time to come up with another solution other than a clean install; it took me about 30min and another hour downloading all the updates before I re-installed the user's programs, creating accounts, joining to the domain, etc. It now works like a charm.
I love the battle to figure out what really is happening, what application made Windows 7 fail this way... Whatever it was, people are talking about it all over the place but no one has come up with a "real" solution. I guess time will tell. I hate to leave a battle unresolved but time is king and this customer was not willing to become my guinea pig.
In the meantime ... this will be the accepted solution as this is what solved the issue and as for the points, all go to you centerv since you were the only one who tried to help and offered some insight to possible solutions.
I appreciate very much your support. Thank you. I am disappointed that no one else jumped in.
Bits ...