Well, there's positives and negatives about each method...
Option 1- using 2 drives
Unplug your current XP drive, and install Win7.
Positives...
Easy recovery, boot to the O/S you want to keep, and format the other drive.
You don't have to do anything special at bootup if you want to stay in the last O/S used.
Negatives...
You have to go into BIOS to change the first boot device if you want to switch O/Ss
Option 2- using 2 drives leaving XP plugged in, or partitioning 1 drive
Positives...
You get a boot selection screen at startup, and you can pick which O/S you want. Faster than going into BIOS each time
Negatives...
You have to pick an O/S each time you startup, or wait for timeout and the default choice gets picked.
More difficult recovery. To keep Win7 you have to use bcedit to remove the XP choice, then format the XP partition to get the space back for data. To keep XP you need to format the Win7 partitions, then perform a fixmbr to get the XP bootloader back.