The short answer to your question is YES, when you reinstall Windows, you will lose everything on the hard drive.
Part of the process of installation / reinstallation is that you must delete the existing partitions on your hard drive in order to make space for the new partition where the Windows XP OS will be installed. In most cases you will want to do this for a couple of reasons.
Reason 1, if there is any spyware, malware, trojans or any other $hitware code that is implanted on your hard drive, in your registry or elsewhere on the boot partition (usually C:\), you will want to completely remove all that stuff - which leads to reason 2.
Reason 2, when you create a new partition, you must format the partition with a file system - for this you will want to use NTFS as it is the most robust, most secure, and provides for the best methods of file-level and folder-level encryption, NTFS permissions, etc. In order to do this, you must format the HD and during the formatting Windows will prepare the HD for accepting new data and information. Meaning it will completely delete and overwrite any information that was once stored there. This is when it will completely remove all the other files, settings, folders, etc.
Reason 3, IF you have a large enough hard drive to create multiple partitions, and you do not delete the original boot partition, this could create complications and conflicts when your system attempts to boot itself. If you do not specify in the BIOS which partition to boot from, you may unintentionally end up booting back to the OLD partition and any spyware, malware, trojans or any other $hitware code will be repropagated to your Windows System Registry. The reason as to why these spyware, malware, trojans or any other $hitware code are repropagated to your Registry is the fact that AV software will remove strings and files from your hard drive. However, if the spyware, malware, trojans or any other $hitware code have mutated or altered your System Registry in any way while the System Restore functionality is turned on, any System Restore points that have been created will still contain the System Registry Settings that were intact during the Restore Point creation. Thus once you remove the files and strings, most (not necessarily all) AV software will tell you that you must reboot in order to complete the deletion or removal process. When you reboot, guess where the Registry Settings are rebuilt from? The System Restore points which were already created, thus when it rebuilds the System Registry, BAM! the spyware, malware, trojans or any other $hitware code and System Registry Settings are put back into place and you will still have the problems.
SO, use this link below to learn about the FAST (Files and Settings Transfer) wizard to back up your files and settings...the wizard will allow you to choose what items you want to transfer from your OLD system (or OLD partition in this case) to your NEW system (or NEW partition in this case).
The Microsoft KB article on the FAST wizard is here:http://support.microsoft.com/kb/306187
If you have an external USB hard drive that is larger than say 5GB - although having an external HD that is about 30-40 GB is really helpful for backup and restore purposes. Or you can burn the FAST wizard transfer file to a CD-ROM or DVD-ROM if you do not have that many files to migrate.
I'm guessing that reinstallation is necessary in order to remove spyware, malware, trojans or any other $hitware code that is slowing down performance or otherwise robbing your system of RAM and CPU cycle resources.
Another good tip. When you reinstall your Windows XP OS, leave yourself about 20-25% of your HD capacity as unpartitioned space. Later once the Windows OS is installed, you can make yourself a backup partition from the additional unpartitioned space to save your backup files, FAST wizard transfer files, etc.
Anyway, i know there's a lot of information here, but i feel a moral obligation to share this knowledge with the novices...remember a novice is never a novice forever, and the more information you have to work with, the more tools in your arsenal you have to combat the malware masses.
Best of luck and happy hacking!