Sorry this must be me, but I don't understand the significance of trying to install a modem and Windows XP Security Center/Firewall problems.

How are they connected?

What do you mean when you say "I have tried twice to load-reload XP, "same thing". How have you tried to load/reload XP? What same thing? What error messages do you get?

Question: Does your wife's computer have a valid version of XP installed on it? If not, SP2 will find out, and fail to install.

How did you try to set up a dial-up connection? Did you go throught the Connection Wizard in My Network Places?