Spyware, viruses, & security : Virus trouble - multiple major problems - Help please!

Virus trouble - multiple major problems - Help please!

I started seeing a virus alert in my AVG (Grisoft) program, then it would hang up. I've tried everyhing that I could by reading the message boards, but it's only gotten worse, to the point where I think I need to reformat & reload the OS. But, I'd appreciate any ideas.

I'm running XP Home SP 2
Here’s what happens:

Virus (AVG) and spyware (Adaware, Stinger, etc) scans all hang up in C:Documents and settings/<user>/Local Settings/Temporary internet files.

I was able to open the folder once and there were a large number of folders and pictures of random things (some guy dancing, the Arc de Triomphe, etc ). I was able to delete all the other user TIF files, but I cannot delete the contents of this folder. Every time I try to delete it, or even just open it now, the system hangs.

Tried System Restore on multiple points, but it would go through the motions, then restart by saying no changes were made.

Now, every time I start up, a warning screen comes up about hard drive trouble and that it is going to "check the disk for consistency". If I let it scan, it hangs up in step 2 of 3 at about 4%. I can skip the process and get into windows.

Tried Ctrl-Alt-Del to see what processes are running. I can bring up the task manager, but when I click on the process tab, it closes.

I was doing some scanning in safe mode when this began, but now, I can’t start safe mode - it starts scrolling through of screen of loading files (like it used to), but hangs up without completing.

When I am able to shut down the computer via the start menu, about ½ the time there are “windows updates” waiting to install, but I’ve disconnected from the internet when this began.

Finally, there is an odd icon in the task bar by the clock. It is an angled box with what looks like a starburst above it. I double click it and get a blank warning dialog. It has the triangle exclamation point and an "ok" button, but no text.

Any ideas would be appreciated before I reformat & reinstall.