What is the alg.exe process? It is usually not spyware but rather system component of Microsoft Windows. Abbreviation of Application Layer Gateway. This program is responsible for Firewall and ICS. If you terminate this process firewall stop working.
Common location of the alg.exe is in the c:\windows\system32\. If process is running from other location. More probable that is spyware or process masking alg.exe as virus.
Known many viruses and spyware programs which masks as alg.exe processes. For example BKDR_HACDEF.M is the memory resident program which installed manually, it open remote command shell allow malefactor to execute virtually any commands on your machine. W32.Petch changes default homepage for Internet Explorer to the page of malefactor and disables security such as firewall. Also it alg.exe file thus system can't start firewall anymore. The Win32.Reign.AK also remove this valuable file.
Some of viruses are also masking as algg.exe, a1g.exe to look very similar to system process and many users does not suspect anything.
Do not try to remove the alg.exe it is important local service! Many spyware removes this program. Even after deletion of virus system remain vulnerable. So to back system in normal state you probably need to reinstall Windows XP or Windows 2000.
Without this service you can't run Internet Connection Sharing. So if ICS stopped working you should check, maybe the virus deleted this file.
The other important notice that if you have Windows XP SP2 or greater this file is not needed and if you see, more probably it is a virus.