Two XP's on the same disk

I did a reinstall of Windows XP Home on a friends computer because he had a bad virus problem and had lost the original CD. I bought a new OEM copy and it installed fine after I deleted all partitions and did a quick format. I then upgraded his memory to 512 MB from 128 MB (both PC2100). The memory shows as 512 and it passed memtest86.
Now when I start the computer I get an option for which windows installation I want to use. If I pick the first one, it starts normally and all is fine. If I choose the second, there is an error message that there is something wrong with the disk or the OS installation.
If I try to boot from the CD, windows setup fails and I get a blue screen. I wanted to do a complete format and reinstall, but Im stuck. The computer works fine if you choose the correct OS installation but my friend is a self proclaimed computerphobe and will not handle this well.

The machine is an HP pavillion 503n with 1.7 GHz Celeron, 40 gig samsung HDD.
Thanks for any help.

Update:
I edited the boot.ini file and removed the second installation in partition(2) even though there is only one partition. That allows me to boot directly to the good copy. The setup CD now runs normally as well.