What about the CD-ROM? Does a CD-ROM icon show up under My Computer? If so, and the CD-ROM drive is damaged or mis-connected, Windows might be attempting to glace at the status of the drive and then gets confused because it isn't working properly.
If you know enough about the insides of a computer, I'd recommend trying to run the computer without the CD-ROM connected to the IDE for a while (make sure any other drives using the same cable are configured as necessary). If the computer works without any problems once the CD-ROM's been disconnected, that's the problem.
Spyware or a virus is, of course, a possibility, so I'm not ruling that one out either.