The solution to the %1 %2 problem you saw is easy to fix and is often but
not exclusively the result of having Symantec's LiveUpdate installed.

First boot to DOS using a floppy and check whether you have a WININIT.INI
file in your C:\WINDOWS folder.  If present rename it to something like
wininit.old and try booting again.  It is also probable that you will have
to repeat the last software install or update that you made.  See MS
KB283069 - "Error Message: Windows Could Not Upgrade the File %1 from %2
%1: %2 (http://support.microsoft.com?kbid=283069).

If you can't find a wininit.ini file then I suspect your problem is due to
the C:\_RESTORE\TEMP folder having around 64K files in it which is the
limit (2**16) for the number of files that can be located in a folder
using the FAT32 filing system.  This then results in the "Cannot upgrade
file %1  from %2.." message when booting.  I suggest you try deleting the
_RESTORE  folder with the loss of any system restore checkpoints you might
have (not that I think they are now usable) and see if that solves the
problem.  Delete the folder as follows:
a) Boot to DOS using a floppy.  Do NOT choose "Minimal Boot" from the menu
when booting from a floppy but rather choose "Start computer with (or
without) CD-ROM support" otherwise the ATTRIB command will not be
available.
b) At the DOS A:\> prompt, type:

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

c) Remove the floppy
d) Reboot your PC

Another problem is that the install/update you were doing will not have
been completely installed so your system may still be unusable and the
install/update will need to be repeated.

e) Delete the folder C:\OLDREST
f) Check that an automatic system restore checkpoint was created.
g) Finally adjust the space allocated to the restore folder: System |
Performance | File System | Hard Disk and adjust the restore slider to
your preferred setting.  A  figure of 200MB is normally more than adequate
for day to day use allowing perhaps a week of checkpoints to be available
although increasing this to perhaps 400MB for a few days during periods of
large installs such Microsoft Office is advisable.
--
Mike Maltby
mike.maltby@gmail.com