After bios posts, but before you see the windows screen .. press F8 (repeatedly if you have to) and boot in safe mode.
When it asks if you want to use "SYSTEM RESTORE", click yes & go back a few weeks.
Alternately, if you have a proper Windows install disc (rather than an OEM "restore disk") you can repair your installation & install some freeware antivirus to clear out the crap - use someone else computer to download it & burn it to CD. AVG & Spybot Search & Destroy work and are free. Other people can recommend others.
The answers to you other questions is yes.
Depending on your country ... YMMV ... in Oz, the sweet spot is currently for the 750GB (7200rpm) HDD's.
And yes, once you install a new OS, you can mount your old partitions & delete the windows folder.
Be aware that Windows Vista protects system files & some directories of the installation may not be visible when running WinXP.
I'm currently running Windows7beta & have mounted my WinXP install, and WinVista(x64) Install partitions.