Downloader.MisleadApp? Vundo? Both?

My computer problem has gone from annoying to detrimental.
My nephew is a gamer and I believe he was trying to use some kind of keygen.
I have no logs to post because at this time I am unable to properly log into my computer.
Initially I received the popup near my taskbar saying: Warning! Security Report Message: Your computer is infected! It is recommended to start spyware cleaner tool.
My Desktop image was a huge warning and my browser would constantly show words and pages telling me to clean my PC and directing me to a website to purchase software.
I looked it up and it appeared to be the Downloader.MisleadApp. I attempted to clean it, but I was unable to use or update my Webroot Spy Sweeper. I received various errors which I believe came from the virus.
I tried various methods to clean my system and eventually used a portable version of AVG and concentrated on my windows/system32 folder (especially the confog folder) because this is where it appeared the virus was.
Now, when I begin my Windows XP I am presented with nothing but my desktop image. No icons, no taskbar, no start button. nothing.
Ctrl-Alt-Delete gives me the error: Task Manager has been disabled by your administrator.
I am also unable to login as an administrator, getting a message like: Unable to Log You on Because of an Account Restriction.
Trying safe mode hasn't fully worked as I am not able to delete certain files, or my system gives me a warning and then shuts down after 60 seconds.
I'm sure I have left out some things here and there, but I hope you are able to help. I am somewhat computer savvy, so I can follow the instructions fairly well.
Thank you in advance for any help you can provide.