We recently had a number of Windows XP (and some WIndows 7) machines display the error message "Generic Host Process for Win32 Services" as below.
This error is displayed on the connection to a RAS server or when plugged into a network connection. After the error is displayed and the button pressed the network connection soon stopped working. Restarting the machine was then the only way of getting the network working again. On connection to the network after restarting the same error would occur.
On Windows 7 systems the error was fixed by appying all available Windows Updates.
On Windows XP systems the error was fixed by disabling the service "Background Intelligent Transfer Service" (BITS). This has the side effect of preventing Windows Update services from working but as there is no longer any updates being produced by Microsoft for Windows XP it has little effect.