XP Boot fails at windows\system32\config\system

Stops boot at thread title with message that file is missing or corrupt. To correct use OS CD to repair, when options come up press 'R' this goes to command prompt and you're to use MS Article #307545 and type in a hole string of registry listings - mine stops at second string "copy c:windows\system32\config\system c:\windows\tmp\system.bak" saying it is unable to copy file.

I tried copying the file from another XP machine to load on the failed and windows will not allow me to copy file. So loaded a new XP on separate partition hoping to be able to transfer file - no go. I can see drive C and the file I need is 0 KB (the other machine has like 7340KB, the new install has about 3200KB.

Does not appear to be a virus (I'm behind NAT& Firewall and religious on keeping AV updated as well as all windows updates).
The machine was working fine ( was at TSG), just froze, and been in hell since. Machine works fine with the new XP install - just all the programs and files on C and I'm booting to E, so machine itself is fine.

Any ideas will be appreciated.