What to do before reformatting phone or setting back to factory state? Recently it seems as if my phone has bogged down to a point where is is almost unusable (Droid Eris running 2.1).  

I'm on the verge of reformatting or setting back to a factory state. I was wondering what things should I do to make sure I have all my contacts/pics/etc.. and what tools can help me accomplish this?  Also what about the apps I have paid for?  How can I get those to transfer?
If you have an SD card, I would copy its contents to a PC.  That should save all of your pictures.
Paid apps are linked to your Google account and can always be re-downloaded.
Have you entered your contacts manually and not synced them to your Google account?  If not, you don't need to back them up; they're in the "cloud", to use the common catchphrase.
If you're rooted, you can use an app like Titanium Backup to save your applications and data, so that you don't need to redownload them (and so your settings, saved games, etc. are backed up).