This is how I fixed my problem from a solution I found on the Internet.
OK. First know that the error message you are getting is very often caused (if not by the issues described by my original post) by using Terminal Server to get into the box and then using SSE. There is a fix for the TS bug posted by Windows.
But, the error message is fairly general; it catches a number of different issues. Your original bug description didn't mention TS and you are *currently* able to get into SSE under a different profile.
So, here's some additional info about how SSE runs under this mode. When you first run SSE this way, it makes a local copy of master etc. in C:\Documents and Settings\<your user account name>\Local Settings\Application Data\Microsoft\Microsoft SQL Server Data\SQLEXPRESS. That's why it's so slow the very first time it loads under a new user profile. It may even timeout the first time you ever use it under a given profile.
Based on your description, it's very possible something went bad in those files for some reason. So, I would first make a backup and then delete the SQLExpress directory under C:\Documents and Settings\<your user account name>\Local Settings\Application Data\Microsoft\Microsoft SQL Server Data. That will get rid of the local copy of master, etc. Then, reboot.
When you run under your user account again and try to connect to SSE, it will recopy all of the appropriate files (master, etc.) to your local settings. It should work after that. You shouldn't worry about the recopy of master etc. Generally, unless you are adding logins, etc, (which you don't need to if you are working with UserInstance=true) the recopy of master should be fine.