You should be able to slot the hdd in with the CD ROM. I'd set the CD-ROM to Master to give it the best transfer rate, and the HDD to slave.
I don't know if you'll be able to keep the drive letters as you want them. I think Windows labels HDD's before CD-ROM's, so will push all CD drives along one letter. You may be able to change the letters through the drive properties in XP, btu I'm not sure.
A reformat should do, unless you want to change from NTFS to FAT32, then you'll have to FDisk and format.