Think of the system registry as the database for all your system settings,
installed software, options, and basically anything else that is not stored
in a folder. The registry contains hives and within those hives are keys
that contain information. Corruption can occur when either keys are deleted
or data is incorrectly modified in the registry. This can cause strange
behavior and in some cases Windows XP to fail during initialization.
It is unfortunate that you can't use System Restore. I would try booting
the system in safe mode and then try System Restore in that mode. Sometimes
that does work. You should run full virus and anti-spyware scans. No
guarantees you will find any malware, but malware has been known to cause
bizarre system behavior.
Unless anybody else has some good suggestions, you should be thinking about
backing up your personal data (while the system is still functioning) and
doing the old format and new system install.