The process is described as “optimizing the boot sector files” beyond the fact that it overwrites some of the files, I can’t tell you exactly what occurs. This area of the hard drive is not visible in windows, you’d have to use disk probe to see it. Frankly, I never needed to know more than that. It works or it doesn’t work. When it fails, there is a tool to repair it in the recovery console, “fixmbr”. That is as much as I ever needed to know about it.
If you really want to know how the file system works, read this:
Technet
As for needing third party tools, some people might benefit from them. Most of them are only applications that make use of tools already built into windows. I will agree that there are some third party apps that do things better than the windows tools, but as you said, they cost money. The three apps that I recommend are Antivirus of some kind. Symantec Corp ver is the best but is resource intensive. And you should stay away from their home use versions, too much crap built in. Many of the free AV apps work almost as well and use fewer resources. I use Symantec on my servers and AVG free on everything else. You also need an anti spyware/malware app. I can’t really recommend any one over the others. At work we have it built into the Antivirus, here at home I’m always running one of the MS beta’s. But I think using Firefox eliminates the vast majority of them. The third app I recommend is Ghost. Sure it costs money, but it’s easy to use and it’s reliable. Anyone can sit down; watch the tutorial, then create an image of their system. If you take the time to really learn how it works, you can even restore individual files from an image. I run DPM here at home, but I still use Ghost to back the DPM server up. I also keep a Ghost image of the base install for every box I have. If I need to do a demonstration of something for a customer, I can have a clean install ready in 10 minutes.
Your comment about signed drivers is somewhat dated and sounds like 2K experience. With XP, signed drivers are tested by MS and seldom cause problems. When Vista gets here, signed drivers will be the only ones that you can install from the GUI. Unsigned drivers will require cmd line switches to over ride the built in protection features.
For those of you who still have 9x games that you like to play, MS just dropped the price of Virtual Server to free. With VS you can host other OS’s virtually on your windows box, running them from a window more or less like an application. Down side is that it takes some serious hardware to do it well.