So you can boot into safe mode and it works fine, you can boot to a live operating system and it works fine but its slow if you boot into the normal environment.
Sounds like a really borked install to me. Don't know if a repair install would be good enough.
You can try to install a fresh copy of XP on a spare drive just for the piece of mind. If it runs nice and fast then it's a crapped install. You can spend hours and hours and hours trying to patch it back up or deliberate on whether or not you want to nuke it and pave it.
Did you say - earlier - this is running SP2? If so, I'd install SP3, sometimes makes a surprising difference to XP machines, and certainly won't do any harm!
I'd also advise them that XP is going to be a liability going forward. Sounds like a good time to switch to new hardware and Win7 Pro w/ XP mode for old apps that won't install/run any other way.
I saw Newegg had a refurb SFF HP with a Core2Duo and Win7 Pro for about $170 :