setting up the PC for "Best Performance" is a very good tip. i always try to disable as much fanciness as i can. however, based upon the description of your situation, i guess you are having problems with "PropertyHandlers". the bad news is that they are difficult to be addressed without a good understanding of the Registry. i used to have a speed problem when hovering or selecting AVI files. i fixed the issue by editing the Registry like this: i navigated to the bold key below, double-clicked the "Default" REG_SZ string, then deleted the "Value Data" inside the textbox (leaving it blank). you might need to reboot for changes to take effect.
[HKEY_CLASSES_ROOT\SystemFileAssociations\.avi\shellex\PropertyHandler]
i'm not saying that AVIs are the specific source of your problem -- although they might be -- however, i do believe that some PropertyHandler is bogging your folder navigation down. if the lethargy happens in all folders, with any type of files, it is hard to pinpoint the culprit. on the other hand, if only some folders are being affected, you can figure out which file type is most likely causing the problem. i really dont think AVG is the culprit there.... i have it running on 2 slow PCs (a P3-700Mhz and a Celeron-900Mhz) with maxed out security settings. trust me, folder navigation is fast in both machines.
here's another Registry tweak you can try: disable the "LastAccessUpdate" feature of XP's File System. if you dont have the DWORD value "NtfsDisableLastAccessUpdate" in the Registry key below, create it and set it to "1". again, you might need to reboot your PC.
[HKEY_LOCAL_MACHINE\SYSTEM\CurrentControlSet\Control\FileSystem]
as stated before, there's a good chance you're infected with some kind of virus or spyware. you should also re-install your video drivers, just in case. only mess with the Registry as a last resort....and backup any key you plan on modifying.