Backup your personal data, then do a format & clean install of Windows.
Please note that a Repair Install (AKA in-place upgrade) will NOT fix this!
cf.
http://michaelstevenstech.com/cleanxpinstall.html#steps
After the clean install, you'll have the equivalent of a "new computer" so
take care of everything on the following page before otherwise connecting
the machine to the internet or a network and before using a USB key that
isn't brand-new or hasn't been freshly formatted:
5 steps to help protect your new computer before you go online
http://www.microsoft.com/protect/computer/advanced/xppc.mspx
HOW TO get a computer running WinXP Gold (no Service Packs) fully patched
(after a clean install)
http://groups.google.com/group/microsoft.public.windowsupdate/msg/3f5afa8ed33e121c
HOW TO get a computer running WinXP SP1(a) or SP2 fully patched (after a
clean install)
http://groups.google.com/group/microsoft.public.windowsxp.general/msg/a066ae41add7dd2b
Also see:
Steps To Help Prevent Spyware
http://www.microsoft.com/protect/computer/spyware/prevent.mspx
Rogue Security Software - Microsoft Security:
http://www.microsoft.com/protect/computer/viruses/rogue.mspx