I agree with Jholland, something doesn't add up. Before you mentioned that this XP installation was an upgrade, from all the modifications and other indication, I could tell this system was upgraded to XP from an older flavor of Windows which 50% spells 'trouble'.
Even worse, this was an upgrade from already unstable and problematic Windows Me. I didn't get the part where you mentioned How did the NT factor into this? Was Windows NT installed after Me or was it an incorrect info and the system was upgraded from Me to XP?
If you enable viewing hidden files and system files under Folder Options > Advanced section, take a look at the root of the C and D drives to see where and how many Boot.ini file variations you see. You might see stuff like Boot.bak or OLD_Boot.ini which would indicate that there are multiple (yet hidden from XP) copies of the Boot.ini file, thus would confirm your statement abuot Boot file being modified previously.
If you open MS Config tool (Start > Run > msconfig > OK) and click on the BOOT.INI page and click the 'Check all Boot Paths' button to see if XP verfies the current path being valid or gives you an error.
Also make sure there are no funky option selected under the 'Advanced' button.
My guess is either this system got hit by a malware or the system/boot files were corrupted due...whatever. I think a fresh install of XP is overdue but for now you could try fixing it.
~TL
