Daemon tools is probably the culprit for what i have been able to find out but like you say you deleted it..
Have you ran a real good reg cleaner?
You should go and download the best on the market which is Reg Supreme, it comes with a fully working 30 day trial..
Download it and run it in deep mode then try installing your service pack once again.
http://www.macecraft.com/downloads/ reg supreme 1.1
I am sorry i cannot help you much further..An XP repair would fix it but seems drastic as i am sure there is an easier answer.
If you want to repair here is what you do, you wil lose no settings at all this way, except you have to reinstall SP1 and seems like this is what you want installed then thats ok
Rebbot with your XP disc in the drive..When you get to the window prompt to pres any key do that and carry on until you get to the part were it asks do you want to install XP or repair, choose INSTALL don't worry next window gives you the choice again, now you can pick repair.
Have you number handy as XP will ask you for it, once you have put that in it will repair and when it reboots you can now install your service pack. It looks like it is installing XP but no worrys it is only a repair.
Oh and make sure you install all other critical updates..
