It doesn't matter what type of data transmission your hdd uses, as long as the system recognizes it.
You can proceed as you said in 1). Just make sure you leave the former hdd unplugged while installing windows, so that you're sure you don't mess with your things, and that Windows is installed solely on the new hdd. When you're through with the install just plug it back again and restart the computer. On Windows logon you will see the drivers for the drive installing themselves and it will be available under the letter D: (probably) under the same label it used to have in your former system. Then you have many options. Let's say you did not get that new drive yet, and let me list you two option : what I consider the best thing to do, and what is the very least you have to do.
1- Buy a SSD... 120GB - 128GB is mandatory if you want a little space to breath after installing Windows, Office, your favorites apps, browsers, games on your main drive. Then what you'll do is relocate your User files on your old HDD (at first put them all in a folder called New Install or else, later you'll be able to reconfigure the general layout to your likes), transfer your things from your old files in the new relocated user files, and then delete everything except the said new relocated user files now populated with your old data. If you want to make sure you could keep your old data files in a folder called Former Install or else, so that you can check later for anything missing. That being said, the best would be to have an external drive to put all your old things in, so you can wipe clean your former HDD before proceeding to relocating your new User folders and putting back your old data in it - even if it means temporarily borrowing it. Even better would be to buy yourself one also and use it for system backup later. But it will be okay if you don't, as long as you work the right way. Here's a great guide you should follow if you're not sure about all of this, whatever drive you choose to buy. It's a three steps guide, the first and the last being the ones you'll focus on. The second step, SSD/HDD optimization, is not necessary, but you can check it out nevertheless if you're curious, or just to see if some settings would not apply better to your needs - don't touch anything if you're not sure, you may ask me here I'll help you sort it out. The first step will help you prepare your system and install Windows 7 in a neat, orderly fashion, the last step will give you directions about how to properly relocate your User folders (so that Windows still finds the paths) and make sure your TRIM command is enabled and Disk defragmenter disabled, should you use a SSD. It will also provide many tips and tools for system maintenance, you should read that.
http://www.overclock.net/t/1156654/seans-windows-7-install-optimization-guide-for-ssds-hdds
2- If you go with a new HDD, at least get something big and fast (!), just install win 7 on it, transfer your old data in your new User files, wipe clean the old HDD, and use it for system/data backup.
You see, option 2 is less interesting. It's one thing to already have all the HDDs you need to proceed to a new install without risking your old data, and hence choosing not to buy a SSD. But when you plan on buying a new storage drive anyway, it is plain stupid not to consider it. If you just wait after Christmas you'll get deals on Newegg and Amazon on both SSDs and HDDs, and you will probably be able to buy both a SSD and an external HDD/1TB internal HDD/or else for not so much more you would normally pay for a single HDD. Well, perhaps it will still take the better part of 50$ more, but it will be a wise investment. Then you'll have a system ten times faster than anything you ever experienced, your old HDD to put all your data and trivial applications in, and your external storage to back all this up. When you buy Intel, Western Digital, or Seagate storage (or if you already own one) then you can get their version of Acronis True Image for free to help you backup your things properly.
Read the guide it's all there and much more!
