Uhhhh....if a bug is that smart enough (e.g. rootkits), the recover may not protect you from existing viruses. It's a gamble, but a good one. If you are really considering installing Win7, then don't waste effort and frustration on the Recover/Restore/rewind routine.
First, if the computer is more than a few years old, you'll wanna make sure it can handle Windows 7. There was a Vista compatibility hardware checker that came out, or just look up the system requirements for Vista/7. (Win7 is really just a huge fix to Vista. The version number is 6.1.) Under XP, you can see the processor speed and memory size by right clicking on the (My) Computer icon, or in the menu, & selecting Properties (or the System control panel). But, that won't tell you if the video card is up to snuff. Good luck.
Formatting a hard drive is NOT just tidying up a few things. It erases the data so that it's gone. Maybe Ben was thinking of "defragmenting," which is unrelated to your question.
Wait until you get your Win7 installation disk. When installing, you'll have the option to format the drive (and re-partition). That'll delete all the data and software (like Office). You'll lose everything. Don't get an upgrade, get a full. You can get an "OEM" disk from Newegg. They're a little cheaper, but you become your own support.
For software removal, check out Revo Uninstaller. AVG shouldn't be that sticky. As far as the piracy warning, that may be accurate, but may be not. There was a short-lived bug (an error, not a virus) a couple years ago where that warning came up as a false alarm. Basically, if the computer has it's windows license sticker on it (and it isn't all rubbed off), you can run a validation wizard and put the 25-character code in again--if it's even a real code. Search for how.
Found one: http://safemode.gidblog.com/2007/04/...ounterfeiting/