It looks as if your windows installation is corrupted in more then one function. The question is if you wish to take drastic measures to fix the problem(s) or you prefer to live with it as is. There are few actions that can be taken. It's your decision how far to go with that.
1: Uninstall the video driver in device manager. In Control Panel click System > Hardware > Device Manager. Click the (+) near Display Adapters and right-click the driver that will show up. Choose uninstall and reboot the computer. Windows will find a default driver and will install it. If the problem is solved and video quality is satisfactory leave it at that and do not install any other driver. This is a simple and safe procedure.
2: For this you will need your XP installation CD. Place it in the drive and click Start > Run. Type sfc /scannow (note the space in the command) and press Enter. This process checks and replaces damaged system files. Simple and safe.
3: XP repair. You need XP CD. Use the link from my list below to an XP repair guide. This process fails quite often and can end up with more problems then you started with. I do not recommend it, preferring full format. Other people think differently. If you go for it backup your data before.
4: Full format and installation of XP.
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