To start off: YES, formatting a USB Drive for use with an Xbox will erase all files that are currently on the USB drive.
In order for the Xbox to format a USB drive for use, the USB drive must go through some checks on performance and available space (minimum of 1GB required). Once that's done you can set how much space you want reserved on the drive to be used by the Xbox.
Viewing these files on a PC is not officially supported by Xbox, so to be able to view these files on a PC you must download a third-party software such as MODIO. Once installed you can use that to browse the USB drive and look at the Xbox files.
Note that Xbox only supports a max 32GB of space on USB drives. This can be either a single 32GB drive or 2 16GB drives.
Step-by-step directions on how to format your drive, along with some additional info.