Hello maxcain, welcome to PCHF.
I'm very confused about these questions.
What's the best way to use these two disks?
If your talking in terms of RAID, the big question is, how do you want to use them? There is no "Best Way" as such as it completely depends on your circumstances and what you use your PC for. One method would be to mirror your two drives. Mirroring your drives means that if something happens to one of your mirrored drives, then you can simply swap it out and you don't lose your data. Recovery time is quick, but has the disadvantage of that fact your only left with 120 gb of space. I personally would only use RAID on a server rather than a personal PC. I would say keep your 240gb of space and backup what you really need onto CD from time to time.
Every 3 months you format your drive it gets wiped out?
Not sure if im mis-interperating you, but this is exactly what a format is meant to do?
Clean install of XP:
This link will help you through the process of installing XP:
XP Clean Install