Keyloggers suck, but this smells like some lame social engeneering thing to me...

how often have we seen this on AO (and all over the place)?
"Help me, someone hacked me and bla bla bla, can u hack him back, i got an IP and bla bla bla"
(i know being suspictious about everyone sucks but hey...its the www )

BUT STILL...
considering that it happened, i sugest you do all the steps mentioned above (including letting it go ), plus this one:

- most of the ppl that use the web download *.exes from p2p,warez and other type of sites, but what they don't often know is that most of the things you dl from doubtefull sources is piggybacked with FTP servers that don't show up as virii, that share your intire HDD and that have faux-amis (false friends) names to lure you into thinking it's a system proggie and letting it through your firewall (if you have one...).

Who knows if the attacker didn't send your gamme-addict brother the latest_super_<enter-game-name>_patch.exe and voila'.

Only to say that without a good security, IDS and logs it's hard to know for sure how he got in, and not knowing is leaving the door opened for others.
I'd go with format c:\