This is typical Sasser activity. It does not matter whether you format and reinstall or not. Until you turn on your firewall and patch the vulnerability you will be wide open to attack. The Sasser worm attacks by REMOTELY seeking out and infecting insecure computers (brand new builds without the patch are the most likely targets); the infected computer then becomes part of the problem.
To sort this out follow these steps
1. Format and reinstall but do NOT allow the computer to connect to the internet.
2. Download the patch to another secure computer. http://www.microsoft.com/technet/sec.../ms04-011.mspx
3. Apply the patch to the newly built computer.
4. Turn on the ICF (Internet connection firewall).
5. Only now is it safe to connect to the internet and update at the Windows update site.
Hope this helps. If you need any more assistance send me a private message.