That (disc 1 internal, disc 2 on a USB drive) has been reported as working, for upgrade installs and MCE, but may be dependent on the external drive.
Unlike some reports I was unable to get my own upgrade install to work using an external FW HD or USB thumbdrive with the check disk data on it. I was however successful in burning XP Home SP2 Upgrade, Windows ME and the Mac drivers to a single DVD+R and installing from that. There are ways to shrink it down to a CD-R, but they seemed like too much work for little gain.
Look in timb's thread for more info.
B