I believe preserves the system setting (including network setup) I believe. You may want to http://www.google.com/search?sourceid=mozclient&ie=utf-8&oe=utf-8&q=Files+and+settings+transfer do some research before formatting (and of course, wait for other, presumably better informed, responses here!)
I've some major problems so I'll have to format my HD and reinstall all the software. Is there any way to keep the system settings? Network prefs, etc etc...