Complicated Situation

Basically this is my setup right now:
-a 160GB IDE Hard Drive with the W7 RC installed (daily use)
-a 80GB SATA Hard Drive with XP installed (just for W7 complications, but has files)
And heres what I want to have when I finish:
-Windows XP with all files etc. on my 160GB IDE HDD
-Windows 7 RETAIL(already bought) with all files from previous installation of 7 on 80GB SATA

I already realize that I must fully backup both hard drives onto an external HDD which I haven't done yet, but have the external HDD ready. My question is first of all what is the best option for backing up all these files for both XP and 7 (I was thinking Easy Transfer for 7?). And also how would I go about basically switching these installations from one HDD to the other?

you want to a software that can clone the drives for you, not just transfer standard files and settings.

Clone XP to other HD, or Create an Image backup of XP to your external drive then reimage to the target IDE drive. Recommend either Macrium Reflect or Paragon Image and Backup 10 free editions. You will then have an XP backup image stored on your external in addition to Win7 files you back up.

Unplug old XP drive and test new XP HD to see if it will start. If not, you may need to run a Repair Install from booted XP CD.

Now you have two choices for dual booting: Preferred would be to unplug XP drive during Win7 install so both drives remain independent and boot via BIOS HD boot order, or the shortcut key given on first bootup screen for Boot Menu.

If you want the Windows-managed Dual Boot, keep XP plugged in during Win7 install and it will configure a dual boot menu. The drives are then interdependent and harder to extricate.

When installing Win7, boot from DVD, select Custom install, use Drive Options to delete all on HD, create new partition(s) as you wish, then format before installing Win7 to first partition.