This isn't really going anywhere. Whatever the true issue is, it's not the harddisk as we have no reason yet to assume it's going bad.
(BTW, Disk 1 is most likely a CD/DVD drive or a card reader. Don't worry about it.)
To the OP: since you have a rescue disc to boot with and can access System Restore, do you have a restore point from before the Windows update you mentioned was installed? If yes, go back to it and then see if Windows boots normally again.
If it does, make a new restore point immediately just to be on the safe side.
Do you remember exactly which update was installed?