wrote:
Could someone please give me some advice.

I have got a SATA HDD from a friends computer - a Seagate 120gig. He
reports it was starting Windows XP then getting BSOD error.

A boot in safe mode shows that it was stopping on mup.sys.

Anyway we put the HDD in my PC to copy the data, but my PC says drive
is not formatted, format now?

So we had a look at the HDD with OnTrack Easy Recovery and got back
most of the important data. A full scan shows I/O Error on Sector.

My question is whats the best thing to do with this HDD from here?

Post the Everest SMART report on the drive.
http://www.majorgeeks.com/download.php?det=4181

Depending on what that shows, run the hard drive manufacturer's
diagnostic on the drive and have it reallocate the bad sector if
there is only one or two pending reallocated sectors. If its got
lots of reallocated sectors, bin it.

Throw it, chkdsk it? format? what?