Yes, it is possible, and formating C:\ will NOT affect D:\
Creating a 2nd parition is actually a good method to use for bakcking up.
Now that you have your data on the 2nd parition, restart your computer and format C:\ from DOS. (if you are going to reinstall Windows 9x)
If you plan on upgrading to Win 2K/XP then boot from your operating system CD, and format C:\ during the setup. (it will give you the option to do this)