Dont format the c:\ within windows, this is most likely where windows is installed and the end result would just be terrible. If you want to re-install windows use on official windows cd and follow the instructions on screen. BACK UP YOUR DATA FIRST!
192.168.1.2 is a local address as many have said. It is not coming from the internet. The threat will be within 50 metres of that router. I suspect you PC has had a VNC server installed. In simple terms, this is a program that will run in the background and allow a user with a VNC client to control your PC from another location as if it were there infront of them. Follow these steps to stop the threat if what is suspected by myself is true:
1) click start > run > appwiz.cpl > ok (this brings up add or remove programs), have a look for anything with the word VNC in it and remove any if you see them)
2) Hold down ctrl + alt + del on you keyboard. This will bring up the windows task manager, Click on processes, again look for something with the word "VNC" in it. If you find somehting move to step 3.
3) Click start > run > msconfig > ok (now click the tab labled as "startup" and untick anything that says VNC. Now click the tab services, check the tickbox next to hide microsoft services and again, untick anything saying VNC)
I hope the above does it for you. If not post back. If the above does it for you still post back. I can show you a few tricks to find out who it was so you can confront them.