Hold on a second.

You wiped the restore files with your virus scanner/manually? That's a big no-no. Bad things could happen...

If you find a virus on your computer, the proper way to remove it is to first disable system restore, then boot in safe mode, let the virus scanner clean the system, follow any additional directions (do a search on the virus/trojan name), and finally re-enable system restore.

Also, are you sure that it was C:/Windows/system/restore and C:/Windows/system ? It should be in C:/System Volume Information/ for system restore points as you mentioned in the OP. It also shouldn't be a folder. Was there any filename after that?

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Anyway... that trojan shouldn't cause that error, and if you've checked for other spyware/virsuses (use a second virus checker like AVG or an online check), I would check for bad sectors on the hard drive, bad RAM, and if you've overclocked, I'd run a stress test.

HDD...
Win+R -> "cmd" -> "chkdsk c: /f /r"

RAM...
memtest86+

OC'd?...
Prime95

PS: If you keep your computer secured properly and perform regular maintenance, there's no reason to reinstall XP monthly/yearly.