OS 10.3 - Need help regs reformat imac

Hi there can someone help me.

My imac is getting very lagging when playing on-line such as Diablo 2 LOD, lag until i GIVE up playing!!

I want to reformat my imac and hope to everything get back to its original and it won't make it lag again! Question is, how to reformat without lossing all my to keep file such as iphoto images, itunes songs, animation etc...I just bought a external 80GB harddisk but just don't know how to make it like 20% for temp transfer data usage and 80% for storage. My imac is abt 4 years old and I never try to divide the hard disk (Coz i don't know HOW .....) Need help on this!!

iMac OSX 10.3.9
Processor 800 MHz PowerPC G4
Memory 768 MB SDRAM
Virtual memory - NO IDEA where to locate it (coz PC has this option)