Reformatting wipes out everything in your computer so you can start fresh as if you just bought the machine. You will have to reinstall all of your software. However, it lets you start with a clean bug-free error-free system that is usually a lot faster (as computer speed deteriorates over time).
First, back up all of the files you need. Then, put the Windows 2000 or XP cd into the drive. Restart the computer and boot from the CD. If you are unable to boot off of the CD, you will have to go into your BIOS and change your boot order.
Once in the setup, follow the directions to erase your Windows drive and reinstall Windows from scratch on your C:\ drive.