adding slave HD,formatting etc.

Why not just install Linux on the 40GB drive you plan to install as a slave? The only thing you have to remember to do is install the bootloader onto /dev/hda instead of /dev/hdb which will be where you install Linux. It should pick up on the Windows installation and make it possible to boot both.

And yes, you should be able to share files. There's three main methods used by people to accomplish this. The first, is a FAT32 partition, since all operating systems can read and write to FAT32 partitions, it makes for a good universal filesystem. The second is to use Windows file sharing via SAMBA on Linux. Problem with this, is Microsoft periodically breaks file sharing compatibility to try and limit the usefulness of programs like SAMBA. Also, SAMBA tools can be difficult to use, and the front ends to it can be equally difficult to get set up. The third method involves running an FTP server, or something similar, on one of the systems. This is probably the most reliable way, since Microsoft is seeking to stop Linux from being able to use FAT32 partitions via patents. If unsuccessful, FAT32 support may well disappear quite abruptly after Vista, so if you have any plans of upgrading in the future... With a minor bit of additional annoyance, FTP is a fast and easy way to share files. There are literally dozens of FTP servers for Windows, Linux, and almost any other operating system you can think of, many free, and hundreds of clients. It's a well understood and stable protocol which is an international standard. Getting help for any problems you might have will be equally easy just by the sheer number of people who know how to set up and troubleshoot an FTP server. That would be my personal recommendation for what to do, but you can decide for yourself.