Compaq Mini 110 - file missing or corrupt and lock out forgot password

I bought my daughter a mini 110 compaq 3yrs ago, last year it stopped working, couldnt get it to go. a friend had a look and was unsure how to fix. put it away and now brought it out and to fix it .... screen has came on asked for a password, which we both have forgotten... read a message on this site and entered a code... now the following message appears -

Windows could not start because the following file is missing

or corrupt:

\WINDOWS\SYSTEM32\CONFIG\SYSTEM

You can attempt to repair this file by starting WIndows Setup

using the original Setup CD-ROM.

Select 'r' at the first screen to start repair.

Where do i go from here im completely lost?

Any help would be very much appreciated. :-))

Bettyruble :-)