Following is /boot/grub/menu.lst:
timeout 5
color black/cyan yellow/cyan
gfxmenu (hd0,2)/boot/gfxmenu
default 0
title 2.6.38.8-pclos1.bfs
kernel (hd0,2)/boot/vmlinuz-2.6.38.8-pclos1.bfs BOOT_IMAGE=2.6.38.8-pclos1.bfs root=LABEL=root
initrd (hd0,2)/boot/initrd-2.6.38.8-pclos1.bfs.img
title Windows
rootnoverify (hd0,0)
makeactive
chainloader +1
title linux
kernel (hd0,2)/boot/vmlinuz BOOT_IMAGE=linux root=LABEL=root
initrd (hd0,2)/boot/initrd.img
title linux nonfb
kernel (hd0,2)/boot/vmlinuz BOOT_IMAGE=linux_nonfb root=LABEL=root
initrd (hd0,2)/boot/initrd.img
title failsafe
kernel (hd0,2)/boot/vmlinuz BOOT_IMAGE=failsafe root=LABEL=root
initrd (hd0,2)/boot/initrd.img
title 2.6.33.5-pclos1.bfs
kernel (hd0,2)/boot/vmlinuz-2.6.33.5-pclos1.bfs BOOT_IMAGE=2.6.33.5-pclos1.bfs root=LABEL=root
initrd (hd0,2)/boot/initrd-2.6.33.5-pclos1.bfs.img
Prior to the kernel update there were only 4 "titles" on the selection screen during bootup: linux, windows, linux nonfb, and failsafe, in that order. Linux was the default. 2.6.38.8-pclos1.bfs, and 2.6.33.5-pclos1.bfs, appeared at the bottom of the list after the kernel update. Using PClinux Control Center, I moved 2.6.38.8-pclos1.bfs to the top of the list and made it the default. Before I noticed the two new items, I booted at least twice using the old default "Linux". Could that have caused any problems?
Here is shot showing both RESTORING/tmp and loop as empty with "hidden files" turned on:

I don't remember creating them and don't know why I might have done so, particularly in the /mnt directory. It appears to me that they can be safely deleted.
The only time I had a problem logging in was right after the kernel update when I found that the mount point for home was wrong and fstab was screwed up. Once I replaced the fstab with the one that was there before and changed the home mount point to /home, that problem went away. With the changes you made to fstab, the root mount point is now back to / and /home is still /home (as seen in PCC local disk management).
There is one other problem. I was going to put this into a new post, but since you asked: I don't know if it is related to the kernel update or not, but it started occurring after the update. When I close the cover on the laptop, of course it is supposed to go into sleep mode and then wake up when it is reopened. That used to work fine. Now, when I open it, I find a black screen full of code and the system is frozen. I must hold the power button to turn the system off and then restart.