For most non-techies, I guess the initial step to learning how to restore Windows XP to factory settings would be to first understand the meaning of the term ‘Factory Settings’. It’s really quite simple, ‘Factory Settings’ refers to the initial state of the computer immediately following an new installation of Windows XP operating system.
But, the question begging to be asked is why would you want or have a need to restore your computer to this state?
There are actually several reasons why you may need to restore XP to factory settings. The first and most common is the existence of stubborn spyware that your antivirus program is unable to resolve or changes that harm your computer e.g. installing a new program or making changes to the system registry.
By resetting your system to a period before the system got infected, you essentially clean it by getting rid of any junk third party software and/or resolving any harmful changes. Spyware causes computers to run slowly and sometimes behave in an annoying manner such when ads keep popping up out of seemingly nowhere.
Restore Process
To restore Windows XP to factory settings you need to perform a complete system restore. Make sure you have the original Windows XP installation CD/DVD or a restore CD/DVD if one was provided by your vendor. Restoring your system will completely delete all the data you have on your computer and it will therefore be a good idea to perform a data back-up.
To perform a back-up of the files and documents you need, go to ‘Start-Accessories-System Tools-Backup’ as shown in the screen capture below.

Follow the onscreen prompts as shown below to select the files and documents you want to back-up.

You need to have some large enough media where you will back-up your data. This could be an external hard drive or DVD.

After your data back-up is successful, you need to reboot your computer. Before you do so, insert the CD/DVD. By default, your computer should attempt to reboot from the CD/DVD and you will get an installation screen. Follow the on screen prompts to restore XP. Make sure you select the NTFS file system as opposed to FAT32 since it is more stable and allows for more advanced security features. The process should take about 30 minutes. You might be wondering why you cannot just run the CD/DVD menu from ‘My Computer’. The reason is because the XP version you are running is likely to be much newer than the installation or recover CD/DVD due to updates and service packs. If you attempt to run it in this way you will get a error message.
Partial System Restore
If you sure when you begun encountering problems on your machine, you can actually restore the settings to a period just before this date – a restore point automatically saved in the system registry. For example, you may be sure that your computer begun acting funny after visiting a certain site on a particular day. To restore the settings to a period before this date, use the ‘System Restore’ feature which can be accessed by going to ‘Start-Accessories-System Tools-System Restore’, as shown in the screen cap below.

Select ‘Restore my computer to an earlier time’ and in the next screen select a restore point that corresponds to the date just before you begun experiencing problems with your computer.
Click ‘Next’ and a system checkpoint date as shown below.
Click ‘Next’ to confirm the selection as shown below.
Follow the rest of the screen prompts to complete the process. If you got the dates right, you will find that your computer performs normally after completing this process.
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