Is it possible to format my iMac's drive and re-install everything?

"It sure is.

Pop Disc 1 into the CD drive and let it run (if it doesn't start, you may need to open it from your desktop).
Click ""Install Mac OS X and Bundled Software"" or similar (this is what my leopard cd's say)
You'll be asked for your administrative password, as well as to reboot to install the software.
The computer will reboot, and start the installer.
When you're asked where you'd like to install OSX, click on your hard drive. OSX will ask you what to do about the previous install - you want to do a clean install, or to erase and install (can't remember the terminology).

Alternatively, you can access the Disk Utility application while you're in the installer. You can use Disk Utility to erase and repartition the drive (this will take longer, but it means you can be reasonably sure the new owner wont' get your information).

When you repartition the drive:

You want a single partition, formatted as HFS+ Journaled.
You need to instruct the drive to use a GUID partition table. This is under Options.

Let me know if you need more information."