In your position I'd do this:
1. Keep the tiny"system drive" C:\ as is.
2. Remove the D:\ , and expect to lose the MS suite.
3. Buy a name brand HD, ATA 133 80gb for instance.
3a. Seagate, Maxtor, or Western Digital ...
4. Buy it retail (on sale, about 50.00 or so) so I get instruction manual, new IDE cable & a CD with a utility disk to help install it.
5. I'd read the instructions, and inspect the jumper pins on both the new one & old one.
6. Position those jump pins correctly.
7. Use the new IDE cable.
8. Present C:\ as master
9. New big D:\ as slave.
10. Start the PC after confirming jumps and cable connections, then run the utility to format the new D:\ as "storage" (non-system) Fat32 or preferably NTFS file system. (those are your choices)
11. I'd then create a new folder on the D:\ called D:\Program Files
12. I'd install all new programs to that folder
13. Any programs other than winXP programs I would use the add/remove programs to uninstall
14. I'd download new programs, including Open Office 2.0 to replace the MS Office Suite with a comparable one.
15. From now on all installations would be done choosing the non-default program files folder. On the D:\
I'd find the OS installed now might choose to call the new drive E, or something. No big deal.
If for some reason the system drive is in FAT32, I might do the same to the new drive, for consistancy. I doubt it is though. Otherwise, I'd expect good performance this way, having done so in the past.
I might partition the new drive in this way:
partition 1, 10 gb (and this would be basically program files)
partition 2, 70gb (and this would be for large files, like music & video/pictures
Net result would be a much more useable PC, no compromise in data transfer speed from original, but a lot more space to store files. The defrag of the system drive will be fast. Same of the program files partition.
The PC will show 3 HDs in this way. ie: C:\ D:\ E:\