My problems are 100% gone now =D
To fix the divx problem, which it seems was caused by DR divx's right click menu I used this reg file:
Safer than disabling DEM
I think I will recap everything here for anyone with a similair problem who might stumble on this thread:
I *believe* this problem was caused by a conflict with ALCOHOL 120%, so probably it would be wise to uninstall that program before installing SP2.
After doing a inplace upgrade right after installing sp2, i was able to not boot into windows.
I couldnt access recovery console either due to it asking for an administrator password, but I used the utility found at:
to remove the password so I was able to use recovery console.
I used the DISABLE command to disable two ALCOHOL 120 drivers, A347BUS and A347SCSI, I also renamed the files for good measure.
I copied a fresh ATAPI.SYS from a Windows Server 2003 CD (probably an XP CD would be fine) replacing the one in my drivers directory (This is a file that is locked by alcohol 120 during sp2 installation).
I deleted my boot.ini and did a bootcfg /rebuild to make a new one.
I exited recovery console and proceeded with a repair install using my XP (SP2 Slipstreamed) CD.
The repair install finished and on reboot it went into the xp setup at step 3 with 39 minutes remaining as it had before - BUT THIS TIME IT COMPLETED SUCCESFULLY!
I was able to log into windows completely normally, finding nothing changed - except I was experiencing crashes upon right clicking.
It turns out this is caused by SP2 incompatability in DR. DIVX, simply running this reg file:
remedied this problem. (Thanks Infested)
XP is working fine with service pack 2 installed and all my settings etc. etc. are the same as they were before!