Is My Computer Terminally Ill?

My wife's computer is a Presario, about 6 years old, running XP Home. I've kept it pretty clean, but recently something overwhelmed it to a point where it was showing a scary "INFECTED" wallpaper, accompanied by multiple popups and warnings from something called Internet Security 2010.
I tried to reboot into safe mode, but I couldn't get it to boot. It tried to boot, but cycled around and around, saying Windows didn't load successfully and took me back to the reboot screen. It didn't matter which mode I selected, it cycled the same way. I couldn't boot into any of the safe modes, normal or recover.
I moved the HD over to my computer as the slave and ran AVG, SuperAntispyware, Norman Malware, Microsoft Malicious Tool. I found a lot of stuff, so I thought perhaps there was hope. I moved it back to her computer. It still cycles through the boot process.
I read deep into the Read Me First post, but since I can't boot up, I don't see much applicability. Is there any hope to salvage this HD, or should I just reformat and reinstall. I can't find the restore disk that came with the computer. I do have a Compaq disk from an older computer, but it won't accept that. And I do have a copy of XP Home, and I did take down the OEM number when I first noted there was a problem.
How should I proceed?

 

Thanks. I'll move it over to the software forum and have a go at the link you sent. Best, Tom Sherman