External HD?

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Ken Masters the item you showed was very expensive consider it costs $180 for only 80GB. USB 2.0 is 480 megabytes per second. an ATA133 hard disk is about twice that speed. now if all you have is USB 1.1 than that is about one-tenth the speed of USB 2.0

you can have as many physical hard drives as you want but only a minimum of 1 operating system is required on a computer. so no you do not have to install the OS on an external hard disk. my suggestion is if you have USB 2.0 support buy a 120GB, 160GB, 200GB+ internal IDE hard disk and use a USB enclosure like this one:

http://www.newegg.com/app/ViewProductDesc.asp?description=17-145-314&depa=0

if you do not have USB 2.0 than stick with internal hard drives and mount them internally only. USB 1.1 is slow as a dog. or if you have firewire which is almost as fast as USB 2.0 get this:

http://www.newegg.com/app/ViewProductDesc.asp?description=17-145-316&depa=0
 
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