The difference between a Microsoft disk and an OEM (Dell) disk is that the OEM disk is going to have extra stuff on it.  This extra stuff is usually drivers (helpful), support information (sometimes helpful), trial software (slightly annoying), and bundled software that the OEM got paid to include on there (usually very annoying.) 

I prefer to install from a Microsoft disk so that the OS is nice an clean to start with.  Then I add the drivers I need and the software *I* want on my computer.  If you are going to go that route, you will need chipset, video card, and network card.  If you forget about the network card, you end up with a chicken and egg problem where you need drivers for the network card to get on the internet, but you can't get on the internet to get the driver.  If you have those 3 drivers, you can get a basic system going and find everything else as you go along.  BIOS doesn't need a driver.

If you use the OEM disk, you don't have to worry as much about drivers, but you will have to spend a little time cleaning out the clutter of trial and bundled software.

It is uncommon for someone like Dell to ship a drive in a RAID configuration.  Either way, I don't recommend you mess around too much with the drives unless you know what you are doing, or you will loose data.  I would just reinstall on whatever partition Windows is currently on.  Don't forget to back up everything first.

Everything on a computer seems complicated until you do it once.  After that it seems easy.  Hopefully you can have a good learning experience and end up with a fresh and clean computer.

Let us know if you have any other questions.

Different manufacturers offer different methods of restoring your OS partition.  Some, as MrMagoo mentioned, put all their crapware back on the system.  Some are customized images of a basic factory-installed system, complete with drivers and crapware, but before installation of customer-optional software.  HP, IBM, and Compaq seem to favor this approach.

In the case of Dell, however, the "Dell XP Reinstallation CD" is basically the same thing as a regular retail Microsoft CD, except that it is bios-locked to look for a Dell bios.  If you install from the Dell CD you will get the same thing as you get from a retail CD--ie, no crapware and no Dell drivers.  You won't even get Dell wallpaper.

The only difference is the retail CD will require WPA activation, while the Dell CD does not require WPA activation if it is satisfied you have the requisite Dell bios.  (FTR, the Dell CD will install on a non-Dell computer, but it will require activation, and that activation will fail because MS doesn't activate OEM keys, and phone calls to Redmond won't bypass that fact.)

Note that the CD is not tied to any individual service tag number, and not tied to any particular model.  It's just like a retail CD.

But that means you have to provide any drivers that wouldn't be in the retail CD.  That includes chipset, audio, video, nic, and modem, as well as a few others that may be specific to particular models.  Also remember that a retail XP CD doesn't contain SATA drivers, so if you have a SATA hard disk you'll also need that.  These drivers can come from either the "Drivers and Utilities" CD Dell gave you, or you can download the latest drivers from support.dell.com.

Finally, it should be pointed out that on systems targeted at SOHO use, Dell often provides a second, hard-disk based "easy restore" feature.  This is called either Dell Recovery (Vista) or Dell PC-Restore (XP).  These are recovery images stored on an alternate hard disk partition, not on CD or DVD.  Note the distinction between recovery/restore vs. install/reinstall.  These images do put back a completely intact OS partition just as it was when it was shipped, including all drivers, crapware, and even any optional software the customer may have ordered.  This is very different than what you'll get if you use the CD or DVD.

Yes, I would reformat.  That is what is going to clear out the junk that made you start this whole adventure.  You can reformat from within the WinXP install.