You wouldn't have to do SP1 at all because SP2 accumulates all of those fixes. Having your XP cd merged with SP2 is a tremendous time saver, and very rewarding to accomplish it successfully and have it work.
Yes! Once you finish the slipstreaming process, that cd becomes your install cd for everything; repairs & future clean installs if need be. Perform the repair as layed out, for a "temporary" fix. Let's hope it works.
I do not like paper sleeves - use jewel cases; and handle with care.
I would make TWO copies; put one in a drawer. Make sure you keep ALL of your cd's away from light (remember, fluorescent lighting also emits ultraviolet as well as natural light). The dyes that are used to make cd's can be compromised by ultraviolet.
Wipe (actually not technically true) the hd after the salvage, with a W98 (or ME) boot floppy by invoking fdisk and deleting all partitions. Then pop in your SP2 XP and let 'r rip!!!!!
Make sure you format NTFS, but NOT THE QUICK!
BTW, use Nero's version 6. Very stable; gives you all you would ever need in a burning app. I would recommend 220.127.116.11. Works like a dream in XP.
That is downloadable, and if you have a serial # - it'll activate.