I agree. You're right that the boot disk won't see NTFS files, so nothing unusual there, just frustrating. There are other boot disks available, things you'll find online, but my experience with them is that they don't work very well. Simple concept, but apparently hard to pull it off. Also, while I like Partition magic for many things, I wouldn't use it at this stage. My experience there (yours may be different but...) is that you will do more harm than good by converting it over and back again, or messing around with what drive is logocal, primary, blah blah.
There certainly should be a simple Windows reinstallation option. Boot from the CD, and start the normal installation process. When you get to the question about reformatting the drive, just move on and DO NOT reformat. Some questions will be thrown at you regarding there being an existing Windows operating system, that's OK. Go over top of it. This will repalce the Windows files that have become corrupted, but it will leave everything else alone.
That should get it back to where it was. Your start menu and other things may be rearranged, and little things like that, but your files will still be there.
This is what I would do anyways...
Still leaves an underlying question of why SP1 didn't go on. Was it a fluke, and would work if you tried again? Is it a symptom of a bigger problem?