options running XP on newer PCs?

Factory reset would actually be the easiest option - all the drivers will be included in the factory install already.  As for what to do with the drive from Dell, that's entirely up to you. Personally I'd go for the extra space, but it depends on what you need. My main computer serves as a media server, so I need as much room as I can get! :-)

You could install the new drive, copy your data to it, and then do the factory reset. The factory reset should restore the original OS to the original drive, and leave the new one untouched. If you have any doubts, just disconnect the new drive once the copy is done, and reconnect it after the reset. You wouldn't need to fully remove it, just disconnect the SATA cable or power cable to the drive. With the computer powered down and unplugged, of course!

This would give you a system drive + data drive setup with minimal effort, and you'd free up that Pro license. Getting an external for backups in the near future would still be a good idea, but you'd be relatively safe for the refitting.

Once you've gotten the restore done, you can install Virtualbox, create a nice large virtual machine on your system drive, and install XP!

my main concern with moving data (to a new untried hdd or external) is possible corruption or hardware failure, unlikely as that might be, from moving a huge amount of data. That's why I liked the idea of adding the 2nd hdd for W7, and leaving my data where it was.

If I stick with 2 internal hdd, I would use one for backup (otherwise I would return the hdd, and get an external). I'm trying to convince myself of the usefulness of 2 hdd where one is for backup: files are accessible without re-downloading from an external; sata connection eliminates USB connector issues; backup speed might be quicker thru sata than USB (?).

Transfer speed would definately be faster, but I'd be nervous backing up to an internal drive. If something damages your system - power surge for instance - you could end up with your backup drive dead as well as your primary. A lot of risks - power surge, lightning strike, virus - could affect any and all drives in the system. One particularly nasty virus, Cryptolocker, encrypts all the data on all drives on your computer (internal, external and even network) and holds it for ransom. The only way to  recover is to have a separate (not connected at the time) backup drive, which means external or off-site/cloud storage.

With an external drive, you can disconnect it when not being used, giving you an added layer of security. You can also have multiple backup drives, and have just one connected at a time. That way  if one got damaged, you would have another backup as additional insurance.

Whether you transfer your data to a new partition on your existing hard drive, to a new internal, or to an external, I'd copy the files rather than moving them. This would leave the originals untouched until you can verify that the copies are alright. Data corruption is unlikely, but it is possible. It would be better to leave the originals untouched until you know the copy process worked. Copy the files over, make sure everything is there, and open some to check that they're ok.

Once you know your data is ok on its new home, then you can reformat and reinstall. If you're reformatting the drive as part of the reinstall process anyway, it doesn't matter if the old copies of the file are still there. The space will be freed up in the format process.

so it sounds like if you were in my shoes, with having to choose between an inny or outy (not bothy), you'd recommend the outy.

In another thread I started earlier about my dilemma, Andre suggested I use Windows Easy transfer.

http://answers.microsoft.com/en-us/windows/forum/windows_7-windows_install/remove-windows-7-proanytime-upgrade-back-to-pre/5ffa4260-61f7-4c02-99a0-10403d7f2e3b

Would that do the trick for copying? And I assume there must be an automated way to verify if the copy is accurate - how long would that take if copying a TB of data to an external hdd? And now I have to decide what's a reliable external hdd - I've researched reviews today, but it always seems like a statistically significant number of people report issues.

For a backup solution, external is the only option. You're not protecting your data if the copy is still stored in the same computer. As long as you have enough internal HD space for what you need to do, I'd go with the external.

I've never used the Easy Transfer, so I'm afraid I can't give any advice there.

Another possibility would be to do a backup, using the built-in backup feature. The backup includes the ability to verify the data. Since you're "upgrading" to another flavor of the same OS version, the backup format will be the same, so no compatibility issue there, and I know both Home Premium and Pro have the backup function built in. You could do a backup, reinstall, and then restore.

For a TB of data you're looking at a few hours at least - probably an overnight process.