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Situation 2: I wipe my hd clean and reboot windows. The thing that I'm wondering is if I do step 2 I don't have a backup cd of windows it's the type that was already installed on my system.
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If you go 'Situation 2' and wipe (format) your hd, then you wont be able to just 'reboot' windows!! Windows will need to be reinstalled and you wont be able to do that if you dont have a proper Windows CD!