Regarding ditching XP altogether, it's not always pratical to do that. I've got a dual boot (Win7 Ultimate / XP Pro) system, largely because of hardware that I can't find Win7 drivers for or software that's not supported by Win7. Hardware and software all work fine under XP, so why should I pay to upgrade them as well as upgrading the OS when I can easily set up a dual-boot. I might one day replace the hardware when it comes to the end of it's natural, but I'm not going to be forced to when there's an alternative.
If you want to dual-boot, it would be better go use an internal hard-drive. Easy enough to install and Windows 7 will handle the dual-boot set when you run the OS install. External drives should really only be used for removable data that you'd maybe use on more than 1 PC - an operating system doesn't fall into that category. Don't think you can actually install Win7 on an external drive, as that would go against the whole notion of the operating system licence covering an installation of the OS on 1 specific PC. Seem to recall that you can install some versions of Linux on external drives tho', but haven't done it myself.