Your loop - if it says
'Windows  is unable to upgrade file %%1 from %%2', then read on.....

Your %1/%2 error is caused usually by Norton LiveUpdate, corrupting the
System Restore archive - although there are other possible causes.
Do a Search for the file WININIT.INI - if you find it, then rename it to
WININIT.JNK, and reboot - your problem should be gone.
If you don't find it, then try this - Start|Run - enter SCANREG /FIX into
the dialog box, and click OK - windows will reboot - see if that fixes it.
If not, then do a Search on your PC for files named '_RESTORE' (without the
quotes) - you should find the C:\_RESTORE folder - r-click on it, and select
Properties. How many files/folders are there? If it's around 64thousand,
then LiveUpdate has been up to its tricks again, and you'll have to
completely remove the folder  from DOS - use the following method, which
seems to be the easiest at present.

Reboot to DOS using your Startup disk
enter the following commands at the A:\> prompt.

ATTRIB -R -H -S C:\_RESTORE
REN C:\_RESTORE OLDREST

remove the floppy, and reboot to normal windows. - your error should be
gone, and you should now have a new, single restore point. Go to Windows
Explorer, and delete the C:\OLDREST folder

HTH