Doubt it's a dead PC. Sounds like a nasty virus.
I was working on a box like this a couple of weeks ago. Complete mare. It will see an installation floppy if BIOS (that black and white weird stuff before Windows) is told to search Floppy 'A' before hard drive / CD 'C' or 'D').
If you can boot into Windows off a clean system disk or an antivirus floppy, you will be able to run virus checkers / spyware programs (try going for safe mode to start with).
If you can't get into Windows easily, or don't have the expertise to solve it, and don't want to fork out on getting it fixed by a third party, you might just want to reformat / resintall.
Really sorry but don't have time to do step by step posting instructions on here, and will be in and out for several days. This kind of stuff is unpredictable and can take an absolute bloody age too. Spend time on a healthy computer googling about removing viruses and I am sure you will find some helpful sites. Post any v. specific qs here, and there'll doubtless be a few computer boffs to assist...
It might not want to be what anyone wants to hear, but you could contemplate getting a Mac. They've just launched a small, 'cheap' one for £400 where you reuse your screen / mouse / keyboard from a PC to keep costs down. Essentially no viruses, no spyware, no hourly reboots, and is aesthetically lovely, easy to use and great with photos / video of the kids. I was a hardcore Windows user, often putting together PCs, for a seriously long time but just got sick of living with this kind of sh*t.