If you have an xp oem or purchased disk it will not delete any files-If you have a compaq,dell or gateway restore disk it will reformat your drive and youll lose everything. your settings generally will stay intact
Yeah, it'll only change C:/Windows and C:/Documents and Settings because those are the only Windows based Folders. Programs will all be uninstalled of course but its easy enough to reinstall them. With an OEM the files will all stay safe if they're not in the above Folders.