Junk_Mail... can you please be a bit more specific as to what you noticed on each part (you mention mouse, restore, etc.) that makes Update the suspect. Also some info about your system would be helpful.
Trublubush... There're a lot of people out there trying to get into someone elses machine. I suspect, by what you say, that Windows Update had nothing to do with you getting a trojan, maybe you went to a site and got a popup. Hope that you realize that by not using the updates you leave your sister's machine open to the risk of getting those same attacks again.
Some updates (hotfixes) do plug "holes" in Windows that some @#$%^ found and try to exploit. The safest way is for YOU to go the updates and d/l from there using TOOLS... WINDOWS UPDATE and to do this no less than once a week. Updates also scans and replaces old files with newer 1s. It may also be a good idea to check the XP pages of the "eldergeek" and the like for any info about them and other problems.
While keeping your AV up to date is a must, you may want to also use programs like adaware by lavasoft and even the new spyware by microsoft (it should be free till the end of the year) to scan and remove all threats, this last 1 got great reviews by consumer report as the best in the market... it may be a good idea to use more than 1... scans don't take that long.
Just my 2 cents, hope they'll help you.