The XP installer only formats any primary during the first install. Here I use a free Linux for both XP and Vista as well as ubuntu for first deleting and then creating a brand new primary if needed.
The XP installer can delete and create new while Vista now sees the option to format an existing partition. That's one up for Vista there finally. But a good reinstall will see the current MS folders replaced for the new install. I simply prefer the wipe option for seeing everything fresh again.
For AVG a fried lately has been raving about the free edtiion of 8.0.1 now out that includes some new features like antiadaware/spyware, IE Protection.
AVG Free - Download installation files & documentation
The first thing to remember when going to install any protections is to turn off the Windows firewall or anything else that could hamper AVG while trying to install it. If the only problem you are seeing is just those errors downloading a fresh copy or if that was 7.5 try the latest. You will want that anyways rather then trashing the current installl if everything else is running good.