wow, I'm amazed by the amount of scaremongering people listen to! Although I suppose its understandable to err on the side of caution.
Ok, some facts (in normal non-techy-geek-speak!)
A virus is just a program that deliberately corrupts your pc and once embedded is difficult to repair, therefore, a fresh install is easily the best solution.
The USB flash drive issue - although are unlikely to see any adverse effects on a USB drive, that doesn't mean to say you can't transfer an infected file from one pc to another. Its possible.
The standard installation doesn't erase all the old data. Think of a hard drive like a filing cabinet, formatting the drive merely pulls the labels off the files inside, and when a file has no label the information contained is liable to be discarded and new information can be stored in its place (but until this happens the old data just lies redundant). Now, this old data is completely harmless as without the labels in places its unable to do its dirty business! That said, the standard format will be fine, but you will need to format ALL of the hard drive.
If you really want to go to town.... and you absolutely should do this if you are planning to sell your computer... download a free program called KILLDISK. Its extremely simple and effective, it will change all the binary code (OK, OK, I know this is a little bit techy, but binary code is just ones and zeros, no sweat!) into zeros. This will ruthlessly kill EVERYTHING in your hard drive allowing you to re-install your operating system.
Incidentally, even with OEM copies of Windows (which is what you will have if you got a disk when you bought the pc), you can fresh install as many times as you like on the same pc, even after upgrading processors, memory, etc, etc. Just don't change the motherboard!
Finally, a little note on data recovery.... these work by filtering into the filing cabinet files and restoring any labels that got removed. So when you delete a pic of you in your superman pj's, it will remain in your hard drive until something else gets written over it. Thats why its essential to run killdisk on your hard drive before selling a pc, so some nosey person can't see you in your pj's (or steal your email login, bank details, passwords, etc, etc)
Oh, and absolutely finally..... never run two Anti virus programs on one pc. You will end up with a scenario which is a bit like having your son asking for a packet of sweets citing that "mummy said it was ok" then asking his mum for a can of pop citing that "daddy said it was ok." The viruses can play one off the other and get through, so one good anti virus program is better than two!