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Unfortunately, last known good won't help him. "Last known good" gets reset every time you successfully make it past the "enter your password" screen and to the desktop. That's why, if you ever have a system completely screw up after you update drivers/etc. and it's noticeable at the login screen, don't log in - hard reboot the machine and go to last known good.
That said, I'd boot up the harddrive as a secondary in another machine and scan it for viruses/spyware - that sounds really screwed up, that it doesn't even know what to do with .exe files.
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Eat antimatter, Posleen-boy!
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