As you have discovered, it is difficult to remove threats from the restore files. Disabling restore should clear the problem. Installing XP will also remove the threat. I think XP will format the disc to NTFS (ME used FAT32).
While you are doing this, why not install a linux OS too? You can create a dual boot system so that you can select the operating system you want. Linux tends to be less resource hungry than Windows so runs faster on lower spec machines.