Sounds like a corrupt registry to me. You usually can fix this by using the recovery console on the XP setup disc, but not sure if that's accessible through the OEM restore disc.
Might be time to invest in a USB IDE chassis, so you can plug the drive into another system, and fix it that way (or at least back it up).
You can install a new copy over the existing install, technically without losing too much, but I have had good and bad experiences with that method.
If you have access to a Bart PE based bootable disc (or know an IT guy locally), you could probably use that as well (basically running XP from CDrom).
Yet another way of preserving data is by using the Acronis TrueImage rescue disc, which can take a snapshot, then you could mount the image file later as a virtual HD.