Desktop spyware?

So my dad has no idea how to keep his laptop clean, and so he downloaded Ad-Aware. About 5 minutes after he installed it his desktop background was changed to a weird image about spyware which had a link leading to a "Smart Secuirty" website....very very sketchy. He wants me to fix it, and I have no idea what to do. I right clicked on the desktop and the image said it was loading from "Desktop.html" in the Windows folder, so I tried deleteing that, but it just made the background flicker white, and the original background still won't come back. Not long after that, the homepage got hi-jacked too, it turned into one of those stupid search engines that nobody has ever heard of.

Could someone help me with this? I've never ran into anything that ****s with your desktop, so I'm kinda running out of ideas of what to do. I scanned with the Trend Micro online virus scan, then did their worm scan thing, then I scanned it with Norton, nothing came up for either. Ad-Aware and Spy Bot didn't remove it. I have no idea what to do