You can close this. I ended up fixing it myself.
Through Windows PE, I was able to load the hive from the laptop's system32\config directory. Windows 7 registry is a little confusing now. There appears to be couple of files named SYSTEM and one named SYSTEM.LOG2. The size of one of the files named SYSTEM is only 1K. The actual registry file is much larger. When loading an external hive, there is no CurrentControlSet, so I had to edit both ControlSet001 and ControlSet002
Open the registry to HKLM\ControlSet001\Control\SessionManager\Subsystems in the key Windows look for the string consrv:ConServerDllInitilization,2 That consrv is calling the consrv.dll virus file. If the consrv.dll file gets removed, you won't be able to get back into the OS. Change consrv to winsrv and reboot. Make sure to change both ControlSets.
Edited by skyscrapper, 18 January 2012 - 04:47 PM.