I haven't gotten into extraction yet on series2. I have just been updating all my boxes and also bought another last night to replace a series1. I think the encryption is disabled by using this method. However, if it isn't it's my understanding that disabling encryption is as easy as running a script. I think it's called noscramble2.

In all cases, I am using drives other than the drive that shipped with the tivo. I am just paranoid and want to be able to drop-in a clean install if needed. One of the upgrades was done by overwriting a drive that I had previously installed to get more space. The image I use it for a 40GB tivo, so your drive has to be at least that big. If it's bigger, the image will automatically expand.

To do a two-drive system I would run the procedure on the A drive, get that all settled, then follow Hinsdale's how-to on adding a B drive.