When you boot from the disk (I assume you have a CD/DVD), windows will show you the drives on your system. Chose the drive you want and Windows will probably tell you that it needs to be formatted. It should then give you an option to do so right there (If I recall correctly). Format to NTFS and you should be good to go.
Yes, but if you ever need to format your OS drive, you'll lose all your data files. By putting all my data files (.jpg, .avi, .mpg, .doc, etc) on a second partition, I can safely format my OS drive and not have to back everything up first.