Bad CD or drive would most likely lead to not being able to install windows at all.  XP home vs Pro shouldn't matter since they both get the exact same version of IE and MSNIM I think it's worth a shot seeing if that stuff is in the registry like the MS link shows... you could upgrade to IE8 and see if that helps (doubt it) beyond that I'm clueless what else to try.  A reformat and reinstall is a bit of a hassle to go through for this kind of a problem.  If making a new/different windows user account worked it would be the easier fix because you wouldn't have to reinstall any programs or updates that way.