Yep, sounds like a virus.
Ask any past or present Windoze network administrator and they'll tell you XP and Win2k are the best thing to happen to them as far as desktop and laptop clients.
On occasion, I will fix a friend or neighbor's hosed or dead PC that comes in on a gurney. After 20 minutes I'll know whether it's a lost cause or not. At that point I make a ghost image of their drive and copy it up to my fileserver.
Afterwards, I ALWAYS delete and repartition the C: drive and then reload the OS. The most important part on the rebuild is bringing ALL the MS patches up to date (windows update) and making sure your anti-virus signatures are current. (Imagine the fun of working in a large company and having to hunt down and patch infected systems that are eating up all the network bandwidth). Install and run Ad-Aware every now and then to get rid of the Spyware. Sorry, back to the subject. . . When my friend comes to pick up the PC, I use Ghost Explorer to extract and restore the DATA files from the image of their original disk. If they use a dial-up modem at home, I remove the lan card I put in during surgery and close the case. They reinstall their applications from the CD's.
When my kids hose up their PC's, I hand them the the CD and tell them to wipe the disk and reload the OS. All their homework gets saved in their home directories on my server, which gets backed up to tape. Duzn't matter if their PC is dead, they logon to another one in the house and just look on the H: drive for their stuff.
You should get a zip or external hard drive to backup your important files, or burn them to CD. Then you won't think twice about having to start from scratch again.
Sorry for the long speech but it will be less time in the long run and the PC will be faster because it's clean.