It's been awhile since I've done it with XP, but IIRC, what you need to do is format the partition as FAT32, copy the I386 directory from the XP CD to the formatted partition, then use a Win98SE/DOS 7.1 boot disk with smartdrv to start up the machine, navigate to the I386 directory and run winnt.exe. From there setup should run as normal.

I could be forgetting a step somewhere, but that's the general process anyhow.

I believe you are forgetting a step somewhere.
Run winnt.exe did not allow me to partition the separate drive. Instead it asked for the location to install from and proceeded to write files to the same drive.

Edit: found smartdrv in D:\win98

this commandline parameter for winnt.exe sounds like it should do what you want:

/tempdrive:DriveLetter
Directs Setup to place temporary files on the specified partition. For a new installation, Windows XP will also be installed on the specified partition.

so if I understand correctly you should run setup by typing 'winnt.exe /tempdrive:D' (assuming the other partition already exists and is labeled as D)

Not quite what I had in mind but I think I did it.

hdd1 - internal
hdd2 - docking bay
Windows 98 CD
Windows XP CD
Acronis Disk Director 11

hdd1 - Create a FAT32 partition and make active
hdd2 - Copy XP's I386 folder and 98's smartdrv.exe
Boot from Windows 98 CD

Boot from CD
Start computer without CD-ROM support

Now CD is A, hdd1 is C, and hdd2 is D.

1D:
2smartdrv.exe
3CD I386
4winnt /s:D:\I386 /t:C /u:D:\I386\WINNT.SIF

Setup copies files over and reboots
Removed CD and booted to hdd1
Setup converts FAT32 to NTFS then installs XP

when the system starts I have "Microsoft Windows XP Home Edition" and "Previous Operating System On C:" listed. I expect the latter can just be deleted from boot.ini.

Update: It didn't entirely work. The updates I had included were not applied.