Yes, it's oki to boot from cd, format c: and re-install XP to it. If you feel unsure, backup your boot.ini to another drive so it can be restored later.
To share files:
-->
SFP files: Close SFP. Then in cset.ini of one of the SFP installs, edit the paths in[ReferenceResolver], [StaticPath], [Path] and [Favorites]. You can route them to the same folder on the other drive, ie. I changed all "c:SFP..." by "d:SFP..."
-->
My Documents can easily be set to the same folder, right click on My Documents -> Properties -> show it where it's at!
-->
Internet Explorer can have same Temporary Internet Files folder, although I don't know if the files really will be shared. I made the folder on my documents drive.
-->
Outlook (Express) can be pointed to same archives. In Outlook (i hope i translate right from dutch), it's Tools -> E-mail settings -> Data files. I made a 'Mail' folder on the documents drive and routed both Outlook to the same archives. OE has something similar.
--> I set all programs to store their
logs in a Logs folder on that documents drive -how could you guess
--> I told both OS's to put the
swapfile on the same partition: Win-key + Pause -> Advanced -> Performance Settings -> Advanced -> Virtual Memory -> Change.
--> If you made a lean desktop theme, save it and import it in the other OS, that'll save you some time too.
--> ...
Poor Richmo, you must be installing for a week now.

I hope you get all of your setup right soon!