In my opinion, I think it's pointless dual booting two Windows XP installations...but because you asked:
So you currently have Windows XP installed on your current hard drive, and Windows XP installed on the secondary hard drive you've just got...right? Ok then...
You don't need to do any formatting or re-installing of Windows XP anywhere. Nor do you need any specific type of hardware to allow you to dual boot.
Firstly, ensure your primary drive is set to master, and then make sure you've hooked up your second hard drive, and set it to Slave.
The reason why your system isn't recognizing the new Windows XP OS on the second hard drive, and giving you a dual boot option to choose from, is because the second Windows XP OS isn't listed on the boot record, therefore it doesn't know that it exists. So, it's booting into the Windows XP it's always been booting into. It doesn't know any different until you tell it.
You need your Windows XP Installation CD for this. Make sure you set the CD-ROM drive as the primary boot device in the BIOS first. Boot into the CD and enter the Recovery Console. Log into your Windows XP on your 40GB drive (you may need the admin password for this).
Then you need to type the following bootcfg /add. It will scan all hard drives for instances of Windows XP Operating Systems. It should then bring up a list of OSs found, and ask you to select which ones you'd like to add. Select the appropriate number for the Windows XP OS on the new drive. Enter a description in Enter Load Identifier: like 'Windows XP 2' and in Enter Operating System Load Options: you'll want to type /fastdetect.
Type exit to reboot the system.
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