You cannot format a drive/partition that is being used, so if you are trying to format your system partition (The one with Windows XP on it), then you'll have to do outside of the XP environment.
If you want to switch the partition Windows XP is installed on from E: to C:, then you'll probably need to do more than formatting - Formatting leaves the partitions intact, just erases the data on them.
Make sure all of your data that you'd like to keep is backed up on a seperate disk.. CDs.. Something.. (Because you will lose it if you format or repartition!). Boot the computer using the Windows XP CD and let it do its thing for a few minutes. Once it finishes loading the pre-setup, it will ask you a few questions.. One of which should give you a couple of options such as "Repair Windows XP installation", "Recovery Console" and "Install Windows XP" (Not word for word, but you get the idea..). Continue with the option to begin WinXP's installation and you'll be greeted by some options to format and repartition the drive.
Delete all of the partitions you want to change (Providing you don't have stuff you want to keep on them!) and make new partitions according to the sizes you need.
Once you have made your partitions, you will have to format them. I suggest NTFS, unless you dual boot a Windows 9x/Me OS also or require FAT32 support for some other reason.
You will get to choose what partition Windows XP gets installed on from here. Choose C: (Disk 0, partition 1) this time, since this is the partition you want to install it on. The continue with the installation as normal.
Remember to back up everything you want to keep before hand. This is very important... Don't forget things like e-mails, favorites, music, pictures, address book, word documents.. Whatever it is that is important for you to keep.
