Back up the C:/I386 folder and the swsetup and hp driver folder to your usb drive. make those restore discs too, so that you can reverse this.
you can do kit your way. unhide the D or format it.
then hit start and right click my documents and select properties (you can only do it here) select move. when it ask to move the files select yes.
I would reformat windows (using the bart pe cd, the usb hdd and the I386 folder), then I would then make one drive 40 gig the other 260.