You'll need to source necessary drivers for the system (either by brand if it's a brand name, or by identifying components if it's a generic build).
Depending on the Service Pack level of the initial installation, you'll need to start with at least Service Pack 1, then update preferably to Service Pack 3 and at least IE6 Service Pack 1. Then install a respectable anti-virus and manually update it, before the system is safe to go online and download the rest of the necessary updates.
As regards other queries, you cannot re-format the system drive from within Windows - as you comment, how would Windows then be running from that drive? It would have disappeared.
You would need to ensure the computer is set to boot from the CD as first boot device, put the CD in the drive and restart the computer. When the Windows Setup started, you would then need to choose to install Windows to the C: drive, and set the option to re-format the volume. When the installation finished, you would then move on to install all the Service Packs etc I mentioned above, which you 'd need to have made ready beforehand.
Unless you have a SATA harddrive the necessary drivers can be downloaded as well after reformatting and reinstalling windows. With the exception of course of internet connection device-drivers if you need them (normally on CD with the product). Microsoft update offers the most common device-drivers.
The service packs can be downloaded beforehand on separate cd's to avoid long update download time (after genuine validation downloadable from microsoft update site).
As for the reformat, the XP installation CD has as mentioned before, a build-in format-function. It is really quite easy, the setup contains of different stages, and your are prompted about what you want to do, you dont have to be an expert to follow the setup, it asks you in the setup where to install and if you want to format. The windows CD copies the necessary setup start-up files to your computer after the format and starts the installation, automatically.
Booting from a CD is quite simple, most computers display a key (f11 at mine) to enter the bootmenu at startup. Simply press that key and select your CD-drive and it will boot from there.