SOLVED! I will list steps below on how to work around this issue. Note that this fix is best used when SYSTEM RESTORE IS DISABLED (as I had it), otherwise, please use the suggested Microsoft fix (Search the Knowledge Base for 0xc0000001)
Also note that I used Partition Magic 8 for my partitioning needs, but feel free to use whatever method you're comfortable with.
Part 1: Install a new instance of Windows XP
===================
1.) Locate a secondary hard drive for storage if possible, otherwise use a partitioning program to create yourself 2 extra partitions on the current one: one for another install of WinXP, and the other for storage.
2.) Note: Upon boot after the second instance is installed, you will have two options in the boot menu, both most likely saying "Microsoft Windws XP [Professional or Home]". The instance you just installed will be the first option, and the original instance will be the second option. Choose the first.
3.) Install a new instance of Windows XP - don't worry about user accounts or anything, you will only be using the default Administrator account
Part 2: Backing up the easy stuff
===================
1.) Back up all the files you need onto your storage partition (the second Windows XP partition may be used for this, but I do not recommend it as it creates more work later). You may also want to take note of the programs you have installed in Program Files and other miscellaneous folders for reinstall later.
2.) If you attempt to backup any encrypted files, you're out of luck for right now, because only the original creator (in most cases) can access it. I thought all was lost when this happened to me, and my most critical data was encrypted. Continue to Parts 3 and 4 for a solution! I suffered no data loss!
Part 3: Take Ownership of a Folder
===================
1. Disable Simple File Sharing. By default, Windows XP
Professional uses Simple File sharing when not joined to a domain. For additional
information about how to do this, click the following article number to view the
article in the Microsoft Knowledge Base:
How to disable simplified sharing and set permissions on a shared folder in Windows XP
http://support.microsoft.com/default.aspx?kbid=307874
2. Log on as Administrator.
3. Right-click the folder that you want to access, and then click Properties.
4. Click the Security tab, and then click OK on the Security message (if one appears).
5. Click Advanced, and then click the Owner tab.
6. In the Name list, click your user name, Administrator. Click to select the
Replace owner on subcontainers and objects check box.
7. Click OK. The following message may appear, where folder name is the name of the
folder that you want to take ownership of:
You do not have permission to read the contents of directory folder name. Do you
want to replace the directory permissions with permissions granting you Full
Control?
All permissions will be replaced if you press Yes.
Click Yes.
8. Click OK, and then reapply the permissions and security settings above for the
folder and its subfolders. Then refer Part 2 to apply for files.
Part 4: How to Take Ownership of a File
======================
1. Log on as Administrator. Right-click the file you want to take ownership of, and then click Properties.
2. Click the Security tab, and then click OK on the Security message (if one appears).
3. Click Advanced, and then click the Owner tab.
4. In the Name list click Administrator and then click OK. The Administrator now
owns the file. To change the permissions on the files and folders under this folder,
continue to step 5.
5. Click Add.
6. In the Enter the object names to select (examples) list, type the user or group
account to which you want to give access to the file. For example, Administrator.
7. Click OK.
8. In the Group or user names list, click the account that you want (for example,
Administrator), and then click to select the check boxes of the permissions that you
want to assign that user. For example, Full Control [Allow]. Then click OK.
For detailed information, please refer to the following article:
HOW TO: Take Ownership of a File or Folder in Windows XP
http://support.microsoft.com/default.aspx?scid=KB;EN-US;308421
Part 5: Get it all working again
===================
1.) This is why I suggested 2 extra partitions - one for the second instance of Windows XP, and another for storage. If you only had one and used the second instance of XP for storage, then this will be harder, so continue to Part 6.
2.) Wipe both Windows XP partititions
3.) Re-install Windows ONE MORE TIME on a single partition
4.) Start restoring and reinstalling your files!
Part 6: If you only had one extra partition.... (skip if you were able to complete Part 5)
===================
1.) Wipe the original partition containing the first install of Windows XP and reinstall Windows there.
2.) Restore your files from the second instance of Windows XP
3.) Wipe the second instance of Windows XP
4.) (optional) Use a program such as Partition Magic to resize the original partition to allow it to take up the hard drive space originally used by the second instance of Windows XP. Or you can just keep it as a second partition for whatever. It doesn't really matter - it's personal preference now.
5.) Fix your boot.ini file to remove the second instance of Windows XP from the boot menu. (NOTE: If you do not know how to do this, I will not explain it here because you could mess up your system all over again if you do not do it properly. Do your own research or ask around elsewhere)
AND THERE YOU HAVE IT! No data loss, not even your encrypted personal files (usually "My Documents" folders)
I hope this proves useful to someone in the future.
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