You can use an upgrade DVD, but you will have to do a custom install when moving from XP. The EULA does address using the qualifying OS after you use an upgrade version, so you might want to check that for you own information.
If you install Win 7 on your second hard drive with the XP drive still in, it will set up a dual boot situation and place the Win 7 boot files on the XP drive.
If you change the cables to make the Win 7 drive Disk 0, then you will still have to change the boot order in the bios to make the Win 7 drive first priority. If you do this, Win 7 will put the boot files on its own partition and will not set up a dual boot for you, but is it easy to do that later.
In case you are wondering, in my experience, the SATA number determines which drive is drive 0, but the bios disk priortiy determines which OS is booted to. I used to dual boot using the bios setting to set the Win 7 or XP drive first in the priority.