I have a total of 6 partitions on my drive:
[hidden system] OS installed for testing programs, etc
[system] My stable running OS
[data] For storing all my work and personal data files that I frequently access
[data] For storing mainly drivers, manuals and program installers
[hidden system] backup of OS installation with drivers only
[hidden system] backup of OS installation with drivers and some programs
It's very handy that I can separate my OS and data for less clutter and more reliability. I use PartitionMagic PQBoot for Windows to boot between my stable OS and test OS (which both have PQBoot installed). And when I re-install my OS, I don't actually have to install it. I just delete my current OS partition, copy over the partition with OS and drivers and all I have to do is install my programs. It cuts a solid hour or two out or reinstallation!
As far as making partitions, if you haven't installed an OS yet, you can just use
FDISK, which is a simple free DOS program, but this will work only if you are making FAT32 partitions (Windows XP usually likes NTFS).
I believe the Windows XP installer has its own partition manager that can create/modify/convert/delete partitions.