WINDOWS\SYSTEM32\CONFIG\SYSTEM - file MISSING/CORRUPT after Windows XP Update!

[taliesin42]

Sooo...I've been rather too busy to get back to repairing this, as I had fully convinced myself that I finally had THE FINAL STEP that would fix it entirely. All sounded great and easy, made sense, read through all documentation, downloaded the .iso the past two posts spoke of, got all geared up to finally FIX this thing tonight...
...and after booting to the recovery console iso CD, it's a blue screen that says:

Windows Setup
===========

Then inside the gray bar along the bottom, it says: 'Setup is loading files' and loads startup files/programs/hardware, until it finally reaches: 'Starting up Windows'

Then I get the 'Blue Screen Of Death'.
Usual blue screen, white text, and under the 'Technical information:'

*** STOP: 0x0000007E (0xC0000005, 0xF748E0BF, 0xF78D9F08)

*** pci.sys - Address F748E0BF base at F748000, DateStamp 3b7d855c



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Soooo...do any of you tech gurus know exactly what that might mean? Just trying to boot to this recovery console iso on CD so I can type those commands and replace my system files, so I can restart my comp.
Close to just doing a clean reinstall with backup - I just don't know if I HAVE the 4gb free that that method of reinstalling requires! Anyone know what would happen if I did NOT have the 4gb free and tried that 'reinstall windows with backup'?