It was working and then quit working.
Sounds like Windows was damaged.
I had mine do this and couldn't get a repair install to even be offered.

You stated that while trying to repair this, it says the "upgrade" could not find a windows installation.

If you had already upgraded, it would not be looking for a folder to upgrade again, it would be doing repair install, idicating windows is indeed scrambled.

Try putting the drive back on your laptop and foolow this:

http://support.microsoft.com/?kbid=308421

This should let you back into your folders.
Save the data , then re-install XP from scratch, deleting the partition and starting clean.