VHD is the format used by Microsoft VM platforms - and
Disk2VHD of course. VDI is the native format of VirtualBox, and preferred in VirtualBox. I think your guesses as to what the acronyms stand for are probably correct, but I've never needed to know for sure. It's important to know what these formats are, not so important to know how the name was chosen.
Disk2VHD will create the VHD clone whereever you tell it: the disk image is just an ordinary file, so the nature of the controller (SATA? USB? IDE?) attached to the host drive is not important. Disk2VHD does have the ability to write the image back to the source drive, but that's probably a bad idea for lots of reasons. It's a free download, and small, so why not download it and try it?
The VHD or VDI created will roughly approximate the
used size of the source disk, not the source disk capacity. The variant of VHD or VDI used is called "dynamically allocated", meaning that host disk space is only allocated to the VM when the VM needs it. The VM will still "see" a 40GB drive, regardless of how much has been allocated on the host.
Personally I would do the P2V on one laptop, convert the VHD to VDI, get it all running as a VM... and then copy the finished VM folder to the second laptop, adding it to the VBox GUI there (
Machine|Add... or just double click the .vbox file). P2Ving an XP image requires a modicum of work, there's no point in doing it twice.
All of the advice above assumes that you're using VirtualBox: I don't do support here for any non-VBox software.
As to fatal mistakes: as long as you don't modify the source disk, or you keep the original Disk2VHD file as a raw template, then there are no fatal mistakes to make. One tip - if your XP needs to be activated then postpone doing that for as long as possible. You don't want to activate XP as a VM and then decide you wanted to dual boot it instead.