XP / Restore question

Two parts :
1 - anyone know what is happening in XP Home when you see "Windows is
starting ... " [ JUST before the user logon icons appear ( 2 users - no
pwds)], and
2. Restore CD - " Last saved" profile? or just Factory restore ? to fix a
windows system file .

1. Neighbor has pc in boot loop - tries - reboots-tries....

I have same model (Presario 5420 ~2001 era) so put his drive in my PC to
save his pictures/music etc in case needed to reinstall XP. When I put the
drive in my Pc, ( cable select - his was second connection on primary IDE
cable) I booted my drive and it announced - "need to scan secondary
drive - was shutdown improperly" , so I first said no to see 'how bad is
it" and XP saw nothing on the drive ( so serious issue). I rebooted , then
chose " YES" to scan his drive and let it scan/fix his drive and I could
then see his files when I booted my drive - copied his files to CD in case
his disk was dying - all set.

Now with his info saved, I rebooted and ON MY PC I have had 2 boot options
on MY primary drive, ( I often have several drives in there) so I elected
to now boot his ( as secondary drive). His drive booted up - looked good.
I bought back to his house ( thinking I was done) and it hangs (his only
disk drive). So I brought it home again, and, if I make it the ONLY drive
in my PC ( as with his) using primary IDE cable - master connector , it
hangs on my PC too - same spot. Not a hardware issue on his PC.

So , as second drive :
It boots, I see XP Home startup screens, 1 minute later dev mgr scan
happens ( little boxes scanning left to right) , hear the beep, then video
goes blank ( normal so far), and then an XP logo window appears: and
HERE's where it's different -
as second drive THAT XP logo screen shortly therafter ( 1 second?) shows
"Windows is starting ... " ( in 800x600 font) and a few seconds later I
see their 2 profiles ( logon icons).

When it's the ONLY drive, I get to ' THAT XP logo screen ' ( in smaller
font (1024x768?) ) and that's it. I do NOT get the "Windows is starting
.... " info. It doesn't do that last bit. The 2 profiles are on HIS drive
so - when it DOES work - it's fetching that logon info from his drive.

At startup if I press F8 and choose SAFE MODE I see the SAFE MODE window
but then same XP logo window and hangs then too. I tried SAFE MODE with
command prompt - same thing.

Can someone tell me - that far into boot - what is happening ? What files
is it using ? Keep in mind it DID run scandisk and perhaps changed/deleted
SOME file. I can't get a log file ( bootlog.txt) to work.

It's ALMOST there and I don't know " what's NOT working?". Since I have
same PC as he does, I can copy any system file needed - but what ??
I'm debating renaming his system32 folder and copying mine into there to
see if that works, but would like to learn hw to troubleshoot it.

Since no Safe Mode, I'm assuming some system file damaged. I did boot my
drive and rename his pagefile.sys in case it was corrupt. It created
another when I booted as only drive - same symptoms.

AND when his drive is hanging, I do a hard power-off and XP never notices
that I powered it off. I EXPECTED it to announce- shutdown improperly -
need to scan disk - it doesn't.
Back in as second drive ( with another XP drive as primary) and still
works fine.

2. restore ?? With his pictures/music now saved, if I boot his Restore CD
and go back to his last save, is there a chance that it will fix this
issue ? I'm guessing that since it's a Windows glitch that I'd have to
choose " restore to factory". Having seen the menus but never done a
restore I'd just like to know what to tell him - other than " to be safe -
buy a new disk"
and after restore I'll copy XP to the new drive- and we'll put the
original away.

Thanks