Quite a few questions there, and probably the reason why nobody has come back to you sooner!
Basically, backup your documents and your emails/address book, drivers.
For the internet connection, how are you currently connected? The information that you need to go back online should be easily provided by your service provider (be it wireless router, wired router or dial up).
If you only have an XP Upgrade disc, you will need to install 98 first.
Do you have any music libraries on software such as SonicStage? If so, you will need to save the libraries as the software (particularly in the case of SonicStage), may not allow you to play your tracks after a fresh Windows install. (It will see the install as a new/different computer - Google Digital Rights Managent or DRM for further details).
Finally, if you are going to reformat, use this:
It's a free full formatter that I have used dozens of times without any problems.
If you have any other queries, post them here, but one at a time would probably be more helpful to you and to the advisors!