WININET.dll was not found

First check if this is really the problem. type:
dir C:\WINDOWS\system32\wininet.dll
to see if the file really does not exist. I find it difficult to believe since it is part of the OS (which is protected by WFP), and also because it is a major component for Internet access that is needed for browsing (at least with IE).
If it's really not there, try searching for the file in the windows folder. A backup may exist (for instance, in C:\WINDOWS\system32\dllcache). Do this:
C:
cd \WINDOWS
dir /a /s wininet.dll
If it was found you can copy it to C:\WINDOWS\system32.
As a last resort, you can download it from:
http://www.dll-files.com/dllindex/dll-files.shtml?wininet
http://www.dlldump.com/download-dll-files_new.php/dllfiles/W/wininet.dll/6.00.2900.2518/download.html

Hmm. I dont seem to have a C:\WINDOWS directory. I have a C:\WINNT directory that contains a system32\wininet.dll

(ps i am using this laptop now for browsing in firefox - i get that error message if I try and start up explorer)

Are you sure you're using Windows XP? (Usually XP installs to C:\WINDOWS, 2000 installs by default to C:\WINNT).
You can check if this indeed is the running os by typing:
echo %systemroot%
This will print the directory of the currently running OS. If it's different than C:\WINNT then you should check for the existence of wininet.dll in the system32 directory under the directory than was printed.
If indeed the file exists in your current OS, check that if it is not corrupt and if it can be read correctly (maybe your disk have bad sectors or something), try copying it and see if that succeeds.
Also compare the wininet.dll in %systemroot%\system32 to the one in %systemroot%\system32\dllcache. you can do this by typing:
fc /b %systemroot%\system32\wininet.dll %systemroot%\system32\dllcache\wininet.dll
They should be identical. If for any reason they are not, delete the system32\wininet.dll file and WFP would replace it (if it does not, copy it from the dllcache folder).
If it still doesn't work, try replacing the file (backup before you do this!).

P.S. - you should alway use firefox :)

when I get a command window, it says D:\WINDOWS\Sytem32\cmd.exe in title bar, and then first line in this window says
Microsoft Windows XP [Version 5.1.2600]

echoing sytem root command above gives me;

D:\WINDOWS

no system32 directory under that.

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ps. The laptop was kinda working yesterday - I ran spybot and avast because I was getting a lot of error messages and pop ups. They found a load of trojans and spyware. Now I have the current mess.

goto the command prompt and run sfc \scannow and insert your windows disc if the file is missing windows will replace it.

OK - found it - the directory was hidden, but added the dll to it when I found it from the download site you mentioned. This allowed me to download the virus updates, and I could finally do a boot time scan that cleared up a lot of problems on this system.

Thanks!