While using SCCM 2007 R2 to deploy a Windows XP SP3 sysprepped image, I was constantly getting an issue when the imaged machine starts up for the first time and runs the sysprep mini-setup – “Setup was unable to change the password for user account Administrator. Please enter the desired password again.“.

After spending some time Googling, my successful resolution was to combine tips from several other users experiencing similar problems. I needed to recapture my reference machine and ensure the following:
On the reference machine, ensure your sysprep.inf file in the c:sysprep directory has the following settings:
[GuiUnattended]
AdminPassword=*
EncryptedAdminPassword=NO
BLANK PASSWORD
Before running Sysprep, ensure that you set your local Administrator password to blank. You may need to adjust your local policy settings to allow a blank password – use gpedit.msc for this.
REGISTRY SETTING
Ensure the following registry entry does NOT exist. Delete the DefaultPassword entry from HKLMSOFTWAREMICROSOFTWINDOWS NTCURRENTVERSIONWINLOGON

PASSWORD INTO TASK SEQUENCE
Ensure the local administrator password is put into the OS deployment task sequence, usually under the Apply Windows Settings section.
After completing all of these steps, the “Setup was unable to change the password for user account Administrator. Please enter the desired password again.” error no longer occurred.
As a side note, it is worth mentioning the issues I had with the blue screen of death STOP 0x0000007B errors. I was getting a BSOD after imaging machines and the sysprep mini-setup ran for the first time. It appears this was only an issue with VMWare workstation, and the workaround was to close the Virtual Machine, and edit the .vmx configuration file, changing the scsi0.present line from TRUE to FALSE, eg. scsi0.present=”FALSE”