Before you try a reinstall of the system - which would remove all data that you have, try the following:-
----------------------
Use these to remove Malware (Spyware and Adware).

1) SpyBot Search and Destroy
After installing SpyBot Search & Destroy, first press Online, and search for, put a check mark at, and install all updates.
Next, close all Internet Explorer windows, hit 'Check for Problems', and have SpyBot remove all it finds.

2) Get Ad-Aware
After installing Ad-Aware, and before running the program, first press “check for updates now".
Click "Connect" and install all updated components available. Click 'Finish'.
Press "Scan Now", then 'next', and let Ad-Aware scan your drives.
It will find a number of "bad" files and registry keys. Click 'Next' again.
Check all found items, and click 'next' once more.
It will ask you whether you'd like to remove all checked items. Click OK.

Always reboot the computer between each program - both of these may find things that they need to have a reboot of the machine to clear - please reboot and let them finish .

Failing those solving your problems a post of a hijackthis log for the experts to advise.
HijackThis From Here
Download, run, scan, save log, then in notepad copy the FULL log by copy and paste to a post as a reply to this post and an expert with HijackThis Knowldge, will have a go at giving advice. Please note the list of experts names below, very few forum regulars here have had this training.

DO NOT FIX ANYTHING WITH HIJACKTHIS WITHOUT EXPERT ADVICE, most of what it finds you need for normal MS Windows tasks.

Known Spyware HijackThis fighters in DellTalk - If you are, and are not on the list please PM Me.
ChrisRLG
therock247uk
TomCoyote (of http://tomcoyote.org/forums/index.php )
YoKenny
baskar1234

You could also go to one of the more specalist forums where more experts will be able to help.
http://tomcoyote.org/forums/index.php
http://forums.spywareinfo.com/index.php
http://www.net-integration.net/cgi-bin/forum/ikonboard.cgi
http://boards.cexx.org/index.php
Do read the sites FAQ before posting, and advise your problem and what steps you have already done to try to cure your problem.

I, and the other hijack experts mentioned above, are in all those sites (and more) with the same login names. You might get one of us at those sites also to anwser your log, but other experts will also be available.

Rigel,

All of the items you mention can readily be copied to CD for preservation, particularly if you have already have them in folders which will eliminate the need to search the hard disk for them.

For a clean install, set your CD-ROM drive as the first boot device in BIOS (instructions here if you need them). Restart the system with the XP CD in the drive, press a key when the "Press any key to boot from CD..." prompt appears, then follow the procedure given here. At Step #5 delete your existing C:\ partition, create a new partition from the unpartitioned space (you can create more than one partition here if you choose, and set the new D:\ partition as a location for your data files so that you will not need to back them up should you ever need to reinstall Windows again) and format it/them with NTFS (Quick Format).

After the XP installation is complete, you will need to install your system drivers from the CDs you mentioned. Instructions for this can be found here. When the drivers are installed, install your applications.

If you do not already use them, the two programs that ChrisRLG recommends (Spybot and Ad-aware) are useful additions to your computer toolbox to keep your system running clean. Also, since the Blaster worm is still around the Internet, it is prudent to activate the Internet Connection Firewall of Windows XP before going online, which you will need to do to download and install all the Windows Critical Updates that have been released since your Windows XP CD was prepared.