Billy nailed it. I think I just had a brain 
in telling you the chkdsk /r. (I was thinking "r" for repair).
Good that you have Avast already. Your probably right on target about it being old as opposed to a virus. I just seem to point that out as I have found over the years people seem to neglect that and your standard Windows XP disk wont come with any virus protection. One time my sister got a bad virus on her easy child, crashed the hard drive. I went over there and replaced the hard drive and got setup up and going. At that point I left leaving her specific instructions to get Avast as soon as she got online. Well she apparently forgot and I think it was 3 weeks later I was over there replacing the hard drive again. (Her hubby always got on some really shady sites so I wasnt surprised)
So anyways I always try to make it a point to anyone these days!!
When your done doing the chkdsk trying running the setup again and see if it will take the OS.
By the way your on step 2 of 3 according to Microsofts own advice. 3rd step says replace the HD if chkdsk doesnt work. :frown:
http://support.microsoft.com/kb/811150
