Use [] to querify your server in your select statement.

select * from [my-server].mydb.dbo.table1

I would add "with recompile" option to the second SP to see how is going on in next few days.

You may update the databases statistics with higher percentage sampling or...

I don't see problem with this query since it already has proper index defined in the table. You may play around by changing the clustered index to non-clustered index.

I suspect...

You may reinstall the same version of MDAC to see what is going to happen.

What is your MDAC version? Any update to it recently?

After first batch update, Large numebr of data updated that affect the statistics of database but somehow the original execution plan of second SP doesn't use the latest statistics information,...

Call Microsoft sales at 1800-4269400.

Have you run SVRNETCN.exe to enable server protocols (TCP/Named Pipe) for connecting to SQL Server?

http://www.sql-server-performance.com/composite_indexes.asp

SP2 disables the TCP and UDP ports by default to SQL Server. Name Piped only works for computer within same subnet.

You need turn the ports on by configuring XP firewall...

http://support.microsoft.com/default.aspx?scid=kb;en-us;304101

Try sp_grantlogin 'NT Authority\System' and assign this account with 'sa' privilege.

Run DBCC CheckDB to your original databases to ensure there is no consistency error before backing up and restoring them.

The errors point there cound be problems in I/O subsystem, Check application/system logs.

Has the system account be granted to access SQL Server? Is BUILTIN\Administrators account in SQL Server logins?