Looking at this seems to me a mess, by ignoring basic maintance, now seems to require major correction. The mension of Kazaa indicates downloads this is well documented as a scource of infection.both trojens and spyware
Its presumed the windows firewall was disabled, with running Mcfee? running any two programs can be a cause of conflict.
Any infection in the system will also be mirrored in the system restore files, which may not be picked by with a normal scan.
If restore to factory settings is available, this in many systomes only deletes information on the C partition. however the risk of loseing everything is still there.
I would suggest that repeated scans with all available virus and spyware removers. ( with system restore turned off ) backup to CD you state you cannot do so transfer files you want to D Partion
Also run a registary checker. ( these programs have been well documented in the forums )
You could also try to repair OS, and reinstall all other programs where possable.You could also try ChDisk, defrag and disc cleanup ( all in windows )More than one check for updates will be required in both windows, and AVG