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.