Are you using BUG 3.6? Did you use the EXE installer? Which install method did you use, single- or multi-player? Did you select the /AltRoot method?
What version of BTS do you have? BUG requires 3.13 or 3.17.
I have seen this problem with finding the init.xml file on Vista as Vista seems to place odd Unicode characters into the My Documents path for the current user, even when on an English installation. Are you using a foreign language install of Vista? Does your username contain any non-English letters?
After loading up BUG, can you please post the file My Games / BTS / Logs / PythonDbg.log?