Device installation problem

Hope someone out there has seen or knows how to fix this one...
i have acquired a pc running 'xp home sp2' that has a weird driver
installation fault.

Doesn't seem to matter what the new device is, windows cannot locate
software for it and automatically install... this extends to
kb/mouse/hdd's/thumbdrives/optical storage etc.

If i manually poing xp to '%systemroot%\inf%' then it will locate the
appropriate driver with no issues, however i sometimes need to do this twice
or more to install the device.

There is no clue as to when the fault occured or what happened at the time,
the box has since been updated to sp2, but this did not fix the problem.

As far as i can tell, windows is not pre-caching (or whatever it normally
does) the 'in the box' drivers supplied by microsoft.

Anyone got ideas as i really don't want to start again for what i am sure is
a simple fault to rectify.

I have looked at all disabled services and nothing there stands out, i have
looked in the registry in a couple of places but cannot see much that is
obvious.

Any help is appreciated,

thanks in advance

Nick