I FIXED IT!
Just incase anyone else comes on here and looking for a fix, I reloaded XP over the top, which did not fix it, but it did create another user and it worked for it!
I had same problem with Vegas; turns out to be Logitech Keyboard and mouse software. If I disable them in Windows Task Manager under processes the program would work just fine. I think these are 2 of the the programs [EM_EXEC.EXE and iTouch.exe] just click on end process after highlighting them. Can't hurt anything. Try one at a time and see if Video Factory will start. Don't need to reboot or anything. You can also start them back up by clicking Start and then Run [type in EM_EXEC.EXE]