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Another thing that you need to do right away before going on the net is get a firewall in place. XP's will work for incoming threats,but not for something trying to call home from your PC. Use it until you get all the priority updates installed,but then get a decent software firewall such as Zone Alarm installed then shut XP's off. If you go online nowadays with 'no' firewall,you can be infected in less than a minute!
There is another option available to you instead of formatting.
You can buy a legal version of Windows XP (you mention that you have one but it can only be installed on one computer and it must be a retail version, not OEM), then call Microsoft and have them explain you how to change the serial number to make it a legal version.
Good point Usil, I keep forgetting about that. Here's a Knowledgebase articles that explains how to do it (it works for all keys, not just volume ones):
http://support.microsoft.com/default...b;EN-US;328874