IMO: reinstalling is the best solution becase of the backdoor issues involved with malware and spyware infection.
good antivirus protection is also necessary but you also need anti malware and anti spyware progrems if your antivirus does not include them already.
SP2 is must, you can't connect to the internet without a firewall, get a router, hardware firewalls are the best.
you can also make your old computer useful by installing
ASTARO security Gateway on it, free for home use. includes antivirus, firewall and email spam filtering etc.
if you want to save money on antivirus, use
free edition of AVG, limited to home use.
then install
Windows Defender and another program thanks to Google
Spyware Doctor