I think you are right about the folder and sub folder corruption

I would attack it in safemode command prompt. You will have to navigate using dos type commands...

Alternatively fire up the xp box from a diskette, a 98 boot diskette will be fine if the file system is fat32, or ntfs for dos

You may find that the files have a special character in them causing this problem.

You should also check this machine for spyware check here for recommended methods