See if you can get hold of norton ghost. I have used this in the past to 'clone' a windows install onto a larger hard disc 
I have used Norton Ghost and it does a very effective job at cloning one hard drive to another, but I have also used Acronis True Image which is every bit as effective (down to preference I suppose.)
http://www.acronis.com/ and
http://www.norton.com/
I would definitely get rid of the 4 GB drive as this will hamper overall system performance
My personal view would be to partition each drive into 2, so ending up with 4 partitions of 40GB. I would then use a partitionaing tool such as the excellent Acronis Partition Expert to resize each partition when you have settled on the most effective size for what you are using each partition for.(backup, personal files, etc.)
You could of course opt to split the drive into smaller partition sizes, particularly if you want to take advantage of the speed increase that arises by having a partition solely for use as a swap file (in this case 40GB would be more than overkill)
I would personally use NTFS as this is generally robust and using windows XP you have the option to selectively encrypt the contents of the drive on a folder level.
I do not beleive that there are hard and fast rules in these cases and you will adapt your requirementsover time to meet your changing needs.
Sorry if this has turned into a ramble, but hope it helps