Okay, I read the "read this first before posting" sticky post to see if there was something else I could try.
I downloaded rkill to a thumb drive in hopes that I might be able to disable the problem long enough to update malwarebytes. Rkill did save a logfile that said there was a proxy running. When I tried again to update mwb it gave me the same 12007 error. So I looked up "can't update malwarebytes" in google and found a site that said you can copy an updated version's virus definitions from a clean computer via thumb drive. So I did that and ran mwb again. I got no update message saying I was out of date, so I ran the quick scan. It took 17 minutes and found 2 infected files and 1 infected registry key. saved logs before and after removal of the problems, and then mwb prompted me to restart in order to remove the reg key. Upon restart, the problem seems to have gone. Here's the mwb post-removal (pre restart) log
Malwarebytes' Anti-Malware 1.50.1.1100
www.malwarebytes.org
Database version: 6043
Windows 5.1.2600 Service Pack 3 (Safe Mode)
Internet Explorer 6.0.2900.5512
3/13/2011 11:27:07 AM
mbam-log-2011-03-13 (11-27-07).txt
Scan type: Quick scan
Objects scanned: 205272
Time elapsed: 18 minute(s), 6 second(s)
Memory Processes Infected: 0
Memory Modules Infected: 0
Registry Keys Infected: 0
Registry Values Infected: 1
Registry Data Items Infected: 0
Folders Infected: 0
Files Infected: 2
Memory Processes Infected:
(No malicious items detected)
Memory Modules Infected:
(No malicious items detected)
Registry Keys Infected:
(No malicious items detected)
Registry Values Infected:
HKEY_CURRENT_USER\Software\Microsoft\Windows\CurrentVersion\Run\wjgvsmqn (Trojan.FakeAlert.Gen) -> Value: wjgvsmqn -> Quarantined and deleted successfully.
Registry Data Items Infected:
(No malicious items detected)
Folders Infected:
(No malicious items detected)
Files Infected:
c:\documents and settings\Steve\local settings\Temp\0.5336200106546121.exe (Trojan.Dropper) -> Quarantined and deleted successfully.
c:\documents and settings\Steve\local settings\Temp\idkpmrdqy\mkgbicxjfdi.exe (Trojan.FakeAlert.Gen) -> Quarantined and deleted successfully.
and here's the new hijackthis log that I did (my dad did have it on his comp)
Logfile of Trend Micro HijackThis v2.0.4
Scan saved at 12:00:51 PM, on 3/13/2011
Platform: Windows XP SP3 (WinNT 5.01.2600)
MSIE: Internet Explorer v6.00 SP3 (6.00.2900.5512)
Boot mode: Normal
Running processes:
C:\WINDOWS\System32\smss.exe
C:\WINDOWS\system32\winlogon.exe
C:\WINDOWS\system32\services.exe
C:\WINDOWS\system32\lsass.exe
C:\WINDOWS\system32\svchost.exe
C:\WINDOWS\System32\svchost.exe
C:\Program Files\Alwil Software\Avast5\AvastSvc.exe
C:\WINDOWS\Explorer.EXE
C:\PROGRA~1\Yahoo!\browser\ybrwicon.exe
C:\WINDOWS\system32\RUNDLL32.EXE
C:\Program Files\Java\jre6\bin\jusched.exe
C:\PROGRA~1\Yahoo!\browser\ycommon.exe
C:\PROGRA~1\ALWILS~1\Avast5\avastUI.exe
C:\Program Files\Common Files\Real\Update_OB\realsched.exe
C:\WINDOWS\system32\ezSP_Px.exe
C:\WINDOWS\system32\LEXBCES.EXE
C:\WINDOWS\system32\LEXPPS.EXE
C:\WINDOWS\system32\spoolsv.exe
C:\Program Files\Common Files\Apple\Mobile Device Support\AppleMobileDeviceService.exe
C:\Program Files\Bonjour\mDNSResponder.exe
C:\WINDOWS\Microsoft.NET\Framework\v2.0.50727\mscorsvw.exe
C:\Program Files\Common Files\Intuit\Update Service\IntuitUpdateService.exe
C:\Program Files\Java\jre6\bin\jqs.exe
C:\Program Files\Common Files\Motive\McciCMService.exe
C:\PROGRA~1\COMMON~1\Motive\MCCISE~1.EXE
C:\WINDOWS\system32\nvsvc32.exe
C:\WINDOWS\System32\svchost.exe
C:\Program Files\Sony\Photo Server 20\appsrv\PicAppSrv.exe
C:\Program Files\Common Files\Sony Shared\VAIO Media Platform\SV_Httpd.exe
C:\Program Files\Common Files\Sony Shared\VAIO Media Platform\UPnPFramework.exe
C:\WINDOWS\system32\wscntfy.exe
C:\Documents and Settings\Steve\My Documents\Downloads\HijackThis.exe
O2 - BHO: RealPlayer Download and Record Plugin for Internet Explorer - {3049C3E9-B461-4BC5-8870-4C09146192CA} - C:\Documents and Settings\All Users\Application Data\Real\RealPlayer\BrowserRecordPlugin\IE\rpbrowserrecordplugin.dll
O4 - HKLM\..\Run: [NvCplDaemon] RUNDLL32.EXE C:\WINDOWS\system32\NvCpl.dll,NvStartup
O4 - HKLM\..\Run: [SiSUSBRG] C:\WINDOWS\SiSUSBrg.exe
O4 - HKLM\..\Run: [YBrowser] C:\PROGRA~1\Yahoo!\browser\ybrwicon.exe
O4 - HKLM\..\Run: [IPInSightMonitor 01] "C:\Program Files\SBC Yahoo!\Connection Manager\IP InSight\IPMon32.exe"
O4 - HKLM\..\Run: [nwiz] nwiz.exe /install
O4 - HKLM\..\Run: [NvMediaCenter] RUNDLL32.EXE C:\WINDOWS\system32\NvMcTray.dll,NvTaskbarInit
O4 - HKLM\..\Run: [SunJavaUpdateSched] "C:\Program Files\Java\jre6\bin\jusched.exe"
O4 - HKLM\..\Run: [avast5] C:\PROGRA~1\ALWILS~1\Avast5\avastUI.exe /nogui
O4 - HKLM\..\Run: [TkBellExe] "C:\Program Files\Common Files\Real\Update_OB\realsched.exe" -osboot
O4 - HKLM\..\Run: [ezShieldProtector for Px] C:\WINDOWS\system32\ezSP_Px.exe
O4 - HKLM\..\Run: [DWQueuedReporting] "C:\PROGRA~1\COMMON~1\MICROS~1\DW\dwtrig20.exe" -t
O8 - Extra context menu item: Add to AD Black List - C:\Program Files\Avant Browser\AddToADBlackList.htm
O8 - Extra context menu item: Block All Images from the Same Server - C:\Program Files\Avant Browser\AddAllToADBlackList.htm
O8 - Extra context menu item: E&xport to Microsoft Excel - res://D:\OFFICE11\EXCEL.EXE/3000
O8 - Extra context menu item: Highlight - C:\Program Files\Avant Browser\Highlight.htm
O8 - Extra context menu item: Open All Links in This Page... - C:\Program Files\Avant Browser\OpenAllLinks.htm
O8 - Extra context menu item: Open In New Avant Browser - C:\Program Files\Avant Browser\OpenInNewBrowser.htm
O8 - Extra context menu item: Search - C:\Program Files\Avant Browser\Search.htm
O9 - Extra button: AT&T Yahoo! Services - {5BAB4B5B-68BC-4B02-94D6-2FC0DE4A7897} - C:\WINDOWS\System32\shdocvw.dll
O9 - Extra button: Research - {92780B25-18CC-41C8-B9BE-3C9C571A8263} - D:\OFFICE11\REFIEBAR.DLL
O9 - Extra button: (no name) - {e2e2dd38-d088-4134-82b7-f2ba38496583} - C:\WINDOWS\Network Diagnostic\xpnetdiag.exe
O9 - Extra 'Tools' menuitem: @xpsp3res.dll,-20001 - {e2e2dd38-d088-4134-82b7-f2ba38496583} - C:\WINDOWS\Network Diagnostic\xpnetdiag.exe
O9 - Extra button: Messenger - {FB5F1910-F110-11d2-BB9E-00C04F795683} - C:\Program Files\Messenger\msmsgs.exe
O9 - Extra 'Tools' menuitem: Windows Messenger - {FB5F1910-F110-11d2-BB9E-00C04F795683} - C:\Program Files\Messenger\msmsgs.exe
O14 - IERESET.INF: START_PAGE_URL=http://www.sony.com/vaiopeople
O16 - DPF: {30528230-99f7-4bb4-88d8-fa1d4f56a2ab} (Installation Support) - C:\Program Files\Yahoo!\Common\Yinsthelper20073151.dll
O16 - DPF: {E2883E8F-472F-4FB0-9522-AC9BF37916A7} -
http://platformdl.adobe.com/NOS/getPlusPlus/1.6/gp.cab
O20 - AppInit_DLLs: C:\PROGRA~1\Google\GOOGLE~1\GOEC62~1.DLL
O22 - SharedTaskScheduler: Browseui preloader - {438755C2-A8BA-11D1-B96B-00A0C90312E1} - C:\WINDOWS\System32\browseui.dll
O22 - SharedTaskScheduler: Component Categories cache daemon - {8C7461EF-2B13-11d2-BE35-3078302C2030} - C:\WINDOWS\System32\browseui.dll
O23 - Service: Adobe Version Cue CS3 - Adobe Systems Incorporated - C:\Program Files\Common Files\Adobe\Adobe Version Cue CS3\Server\bin\VersionCueCS3.exe
O23 - Service: Apple Mobile Device - Apple Inc. - C:\Program Files\Common Files\Apple\Mobile Device Support\AppleMobileDeviceService.exe
O23 - Service: avast! Antivirus - AVAST Software - C:\Program Files\Alwil Software\Avast5\AvastSvc.exe
O23 - Service: Bonjour Service - Apple Inc. - C:\Program Files\Bonjour\mDNSResponder.exe
O23 - Service: Firebird Server - MAGIX Instance (FirebirdServerMAGIXInstance) - MAGIX® - D:\MAGIX\Common\Database\bin\fbserver.exe
O23 - Service: FLEXnet Licensing Service - Macrovision Europe Ltd. - C:\Program Files\Common Files\Macrovision Shared\FLEXnet Publisher\FNPLicensingService.exe
O23 - Service: Google Desktop Manager 5.8.809.23506 (GoogleDesktopManager-092308-165331) - Google - C:\Program Files\Google\Google Desktop Search\GoogleDesktop.exe
O23 - Service: Google Update Service (gupdate) (gupdate) - Google Inc. - C:\Program Files\Google\Update\GoogleUpdate.exe
O23 - Service: InstallDriver Table Manager (IDriverT) - Macrovision Corporation - C:\Program Files\Common Files\InstallShield\Driver\11\Intel 32\IDriverT.exe
O23 - Service: Intuit Update Service (IntuitUpdateService) - Intuit Inc. - C:\Program Files\Common Files\Intuit\Update Service\IntuitUpdateService.exe
O23 - Service: Java Quick Starter (JavaQuickStarterService) - Sun Microsystems, Inc. - C:\Program Files\Java\jre6\bin\jqs.exe
O23 - Service: LexBce Server (LexBceS) - Lexmark International, Inc. - C:\WINDOWS\system32\LEXBCES.EXE
O23 - Service: McciCMService - Motive Communications, Inc. - C:\Program Files\Common Files\Motive\McciCMService.exe
O23 - Service: McciServiceHost - Alcatel-Lucent - C:\PROGRA~1\COMMON~1\Motive\MCCISE~1.EXE
O23 - Service: NVIDIA Display Driver Service (NVSvc) - NVIDIA Corporation - C:\WINDOWS\system32\nvsvc32.exe
O23 - Service: Sony SPTI Service (SPTISRV) - Sony Corporation - C:\PROGRA~1\COMMON~1\SONYSH~1\AVLib\Sptisrv.exe
O23 - Service: VAIO Media Photo Server (Application) (VAIOMediaPlatform-PhotoServer-AppServer) - Unknown owner - C:\Program Files\Sony\Photo Server 20\appsrv\PicAppSrv.exe
O23 - Service: VAIO Media Photo Server (HTTP) (VAIOMediaPlatform-PhotoServer-HTTP) - Sony Corporation - C:\Program Files\Common Files\Sony Shared\VAIO Media Platform\SV_Httpd.exe
O23 - Service: VAIO Media Photo Server (UPnP) (VAIOMediaPlatform-PhotoServer-UPnP) - Sony Corporation - C:\Program Files\Common Files\Sony Shared\VAIO Media Platform\UPnPFramework.exe
O23 - Service: YPCService - Yahoo! Inc. - C:\WINDOWS\system32\YPCSER~1.EXE
--
End of file - 7543 bytes
As I said, the problem appears to have gone, but I would appreciate closure from you experts

Thanks , and sorry I didn't read the "read this first" post first. Lesson learned.