|"This is XP SP2"|
SP3 was released almost 4 yrs ago, what are you waiting for? You seem to be concerned about being hacked yet you haven't installed the latest security patches M$ has to offer. Out of curiousity, which version of IE are you running?
Do you have an old router than doesn't support WPA? WEP can be hacked in a matter of minutes. You have "all firewalls, peerblock, spybot etc" yet your wireless network is vulnerable. I suggest you seriously rethink your system security.
As for the connection issue, if you don't already have it, I suggest you install CCleaner-Slim. Start by running the Cleaner & Registry scanner. Then click on Tools > Startup & review the list. Very few startup entries are actually needed & you should be able to identify each one of them. Disable or delete whatever you don't want loading, then reboot & see if you can access the internet.