Personally I like to put my OS on a 20-40 Gb partition on my fastest drive. The rest of the drive become D:
Additional drives get one big partition each.
C: is for installed software only.
D: is for personal/business files and special folders (desktop, my documents, email store folder, mozilla/firefox profiles).
Other files can go anywhere but C:
Keeping C: and D: on the same drive ensures that D: is always going to be there as expected.
Additionally I run regular backups on my OS (True Image) and my Personal Files (Retrospect).
By keeping the OS and Personal Data partitions on HD 1 (C&D) and the backups on HD 2, both drives have to fail at once for me to lose anything important.
(Actually my 2nd hard drive is a RAID 1 array of two WD 400GB RE2's so three hard drives have to fail before I lose more than a days worth of data, or have to reinstall anything)
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I am guessing that the 250 is up to 10 MB/s faster (average read) than the older 120 GB.
So given my backup stragtegy and personal preferences I would put a 20-40 GB OS partition on the 250, partition the rest as D: and keep my personal files and some special folder's there. And use the 120 for backups.
However if the 250 required a reinstall of XP due to the SATA controller, I would probably keep my OS on the 120 until I felt like reinstalling.
Then any other drive gets one big partition.
I think you new 250GB might have about a 10 MB/s faster average read rate than your older 120 GB drive.