It does need formatting before you can use it Simon but XP will detect it and say that it needs formatting and I think will give you the option of doing it at that point.
If it doesnt do that just go into admin tools/computer management/diskmanagement then format it from there.
I would be suprised if your pc cant see a 120 gig drive Simon but it would be wise to check the bios limitation of your mobo, it may even have a later bios that will overcome a limit if it is smaller than you require.
Also most drive manufacturers have a utility that will overcome a bios limitation although possibly not up to the full size of the drive.
XP itself has a 137 gig limit without SP1 or SP2 being installed.
The second drive is only limited by the bios on you pc, you can have a 20 gig mster and a 250 gig slave if your bios will see it.
If you have run out of IDE primary and secondary and master and slave channels and are reluctant to ditch say your dvd rom drive in favour of a slave hard drive then you wil need another PCI card with an IDE controller on it, this will allow you two further IDE channels with 2 IDE drives per channel.
I think they usually have their own bios on the card too so if you had an old pc with a limitation of say 65 gig these would probably alow the later larger drives