To prevent piracy, Windows is built to detect major changes in hardware and trigger a reactivation(without this, i would just install windows and clone it to all my computers for free) message.
In the worse case, it will just keep blue screen erroring on you. Best case it works and you just have to activate and move on.
As for files, a reactivate will not loose any files, but if you reformat the hard drive, all files will be lost. The best bet there is to back up all files before this.
If you want to try a clean install(format then install windows be it xp or 7), you will need a windows CD or DVD, this may or may not have shipped with the system. If it did not, you would need to find a copy of the cd from a friend. I do NOT recommend getting the cd off the net as it can come with some nasty stuff. For XP MCE, you should have a COA(CD key, certificate of authenticity) on the computer somewhere.
As for Windows 7, It cost anywhere from 100-125 for the OEM Home Premium(what replaced XP Home, but it also has Media Center if you ever want it).
OEM copies of windows are like the one installed now, It is designed to be installed on one computer and left there. Microsoft considers a new board to be a new computer, however you can upgrade video cpu ect without issues and even change the board in some cases.
One thing to keep an eye on. A 32 bit version of Windows will only be able to access 4 gigabytes of TOTAL memory. So if you have 4 gigabytes and a 1gigabyte video card, you will only get 3 gigabytes of usable memory in windows. If you want to avoid this, get a 64 bit version of windows(7 recommended over xp 64 bit)
I am not trying to bog you down with info overload, but i want you to know anything that may help you with you decision or any problems you may run into.
So recap.
-Format = all files gone. do not do that unless you have backed up first.
-There is no guarantee that a straight hard drive swap will work. Chances are if there is no blue screen errors after the swap you will just have to activate again when it asks you to and be on your way. A driver CD with the board will also have the drivers you need to get underway with the new board
-Do not worry about asking questions. there are lots of users here to help you.