If there is nothing else wrong with your system you should be able to boot with the original CD and run the second repair option. If this works you can then update using the SP2 CD. You will have to update everything added to XP since SP2 but MS will take care of that for you.
I just finished spending over a week fighting a set of problems including what you describe. I could get up and running doing what I described above but that didn't cure the overall problem. The final solution was when I destroyed my operating system partition. I did something stupid to cause that but it worked out well in the end.
I should have done this a lot earlier but I was too stubborn. I reformatted my operating system partition and made a fresh XP installation. I'm still catching up on adding all of my programs.
The repair process is easier if you have a bootable CD with SP2 slipstreamed. That's not any help now though.
OK, now I'm feeling some encouragement.
Also, I can buy a full SP2 install disc at Staples, but I'm thinking that because the serial number won't match my original SN, it might complain. But I might be misunderstanding that issue.
If I did buy a full WinXP SP2 install disc from Staples, and booted from it, from your experience with your recent problems, would that stand a decent chance of repairing my SP system, to at least get it to start up?
If not, then I'll try your suggestion of repairing from the original pre-SP1 install disc and then update again to SP2 with the SP2 CD.