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reset to factory settings

You should go to this link, it will explains how to remove the virus : http://malwaretips.com/blogs/remove-police-trojan/
 
Solution
Definitely, remove the infection before doing anything else, like a restore. I would just download, burn to CD or DVD the free Kaspersky Rescue Disk 10, boot from it, let it update its definitions and then clean the machine. You can get it from HERE.