Is your recovery disc scratched? That could be why it doesn't find the EULA

Try to make a new copy of it using the trial version of alchohol 120% as it can sometimes repair the missing script on a scratched disc.

You can't format the same directory that you are using... it should have read something like C:\format \s or similar (been a while). where C is the directory that needs formating and you are in a different directory. But I don't think it will work anyway as there is no true DOS program installed on/in windows XP

reboot with the recovery cd and follow the prompts very closely.