Just launch Windows Media Player and it should search for files it can play on your Smartcard and in the "My Documents" folder on the phone. Even if files are in subfolders WMP picks them up.
There is a demo of the All-Explorer program which allows you to browse the card, but you shouldn't really need to - the phone is quite smart at working out what you want from the card depending on the program you are running.
If you install programs on the card then the Programs menu will launch it from the card. The only annoying thing is installing the programs in the first place. The supplied card has an autolanching program with runs as soon as you insert the card, so that's one way. If you download a program (usually in CAB format) and want to install it you have two options:
1) Use All-Explorer
2) Save it on IPSMWindowsStart Menu instead of on the SD card. Now you will be able to select it from the Programs menu. Once you run this installer program it should ask you where you want to install it (phone or card) and will then install it and delete itself from the start menu.
On the formatting issue. I haven't had to format the SD card I got, but I would imagin if you did the phone should be able to format it for you.
Barry