Leave the Windows drive alone and put Linux on a seperate drive. Use Linux as your boot drive and do not erase the MBR on the Windows drive. This way you can select either drive to boot to in the BIOS if LILO or GRUB (mult-boot loaders) are not yet configure properly to boot to Windows.
You can use the 120 GB hard drive for winows by cloning the partition using Norton Ghost or using utilities from
SystemRescueCd. Then use the 40 GB hard drive for Linux.
To be safe, you can disconnect the windows drive before installing Linux.
You can use either LILO or GRUB. I picked GRUB because you can easily change the config with another distribution like Knoppix instead or re-installing the bootloader like LILO every time the config file is changed.