Phal dilemma...rescue with bad roots and developing spike

[JenHowlett]

I rescued a mini phal from the Lowe's clearance rack a few weeks ago. I got it home, soaked it, removed it from the dessicated sphag and repotted it in a small terra cotta orchid pot (think fist-sized) with good drainage and bark medium. It had a lot of roots rotted away, but several still looked viable. About a week later, it started developing a spike which (see photos) is now about 4 inches long. Yesterday, I noticed that the leaves were starting to look a little crinkled, and today I decided that it could be serious enough that I needed to get a good look at the roots. The photos are below.

I realize that I'm probably going to have to cut the spike to save the plant *sigh*. Should I sphag-n-bag or repot in fresh bark? I've got it soaking a mild fertilizer/ST solution at the moment

The roots look more or less the same as they did when I got it...is there any possibility that I'm so afraid of overwatering that I'm underwatering?