First things first?
Will recovery disks work on larger drive? Yes. [IIRC, for XP pre-SP1 I think LBA (Large Block Addressing, for drives larger than 137GB) needs to be enabled - (it's in BIOS for IDE drives) and also in the properties tab for the hard drive.]
Let's start at the start. You mention that IE is hosed and that you can't install (re-install) the driver. This raises warning flags. IE doesn't have a driver, does it? Hasty surmise is you've got an infection or a munged install; at any rate, an unusable system.
Have you tried rebooting to safe mode and selecting "last known good"? Or system restore? For the latter, ensure you pick a date before you starting having troubles. Back up personal data beforehand.
If those don't work, then on to recover. Easiest might be ReImage. It's cheaper than the tech you hired and it works.
Otherwise, as suggested above, try to do a repair install as scottsplace says. IIRC, this can be done with the recovery disks you made. However, I've had mixed experience with them; any errors on read and it's no go. I like the suggestion he gives, either use the upgrade disk or download and burn (at slower setting and with verification) the relevant ISO file and use that.
For Windows and Microsoft app product numbers and license keys as well as for a fair number of installed commercial programs, Belarc Advisor should help.
While image backups are great for an existing _properly_ running system they're not necessarily the best thing to think about right now.
Back up (click and drag is fine) any personal or work files you absolutely need to another physical drive. If you have the time and inclination, also backup app install files. Don't bother with anything else. If the repair works, you're golden; if not, you're going to have to re-install everything anyway.
Be careful with the repair install; I've done twenty or so, it usually works fine. On XP, read directions carefully (search for method online) because if I recall, it's the _second_ repair option that is used - PLEASE search and read carefully beforehand. (Sorry, haven't done this for a few years.)
Whether by repair or re-install, once you have a properly running system, _then_ do an image backup. DriveImage XML works fine and it's free. In fact do several: pristine install; install after service packs and hotfixes; and a third after you've installed all your apps. Then set up a regular backup routine using whatever method is congenial to you.
For future, I suggest using Secunia PSI, eruNT (backs up all registry hives on boot), and make yourself a Reatogo live XP CD for repair and recovery.
If I am not too late, before I did ANYTHING, I would Run System File Checker. It has fixed lots of XP problems in the past. It is part of Windows XP, located in your Windows System32 directory. Open the command terminal or go to Start, run, SFC /scannow. This should check and fix all of your original XP files against the i386 folder on your Windows XP CD.