Your computer skills are growing I see. The system.sav is where the Compaq info is hidden. No, do not delete that. In fact do not delete the primary partition unless you already have. If so, just create a primary DOS partition and set it active.
The ME is stored both on the hard drive in that small partition and on the CD. It identifies the machine model, etc. and loads appropriately. You have already said that the recovery CD did not work, and that was before your exploration. There is no need to go down that path again, unless you have a few minutes to kill.
Has ANYTHING changed in that computer in terms of components - RAM, hard drive, anything since new? Some Compaq models and other manufacturers too, had the setup keyed to the hard drive model and number, so savvy users couod not go around loading that restore information on other peoples computers. It is also set to only recognize a Compaq BIOS, etc.
I would indeed contact Compaq about a recovery CD that works if you have the model #, and the Windows key code (25 digits) that is/was stored on the hard drive and is also present on that CD in some folder somewhere. I am assuming, and correct me if wrong, that there is NO DOUBT that it is the exact recovery CD that came with that particular machine. Some people have two Compaqs or more and get them mixed up. They must match.
If all else fails and Compaq cannot/will not help, you can install a new operating system. You said you had XP? If so, then delete all the partitions (no reason to save anything now, as your personal data is long gone) and make 1 primary partition and set it active. The XP CD will walk you through the install or here is a link:
http://www.computerhope.com/cgi-bin/yabb/YaBB.cgi?board=1;action=display;num=1128543919There is a LOT of information there to make it easy!Since this is no doubt a legitimate Windows XP CD you will have the code to activate it. If not, it will cease function after 30 days, or not install. Make sure the CD is clean and look for holographic markings on it.
That computer can live. Does it have enough RAM? 256 will get you by, but 512 will make it better. If you have less than 256, you might think about a used WinME off of eBay for a better experience.
Hang in there. I just need some info. Please answer the questions posed.