The 120 slave is an independent drive (from the 40) so they can both have different File Systems. NTFS on either and FAT32 also on either or any combination you choose.
What I'd suggest is download a windows 98 bootdisk from
here and create a bootable floppy.
Boot from this floppy disk and fdisk the 120GB first and format it to FAT32.
You have not written whether you want the 120 formatted as NTFS or FAT32. While NTFS is the more stable, efficient system, but since you want to store data files, in the event you need to access the 120 from DOS because the XP disk has crashed, it's preferable to format the 120 as FAT32. You can always convert it to NTFS if you so choose later using any third party utility.
Remember, the 120 has nothing to do with the 40. Both are mutually exclusive and each can have whatever File System you choose.