You're going to run into trouble if your Time Machine drive is smaller than your working drive, unless you keep your working drive to under 350 or 400 gigs. Time Machine does incremental backups and in a week or two or four you'll run out of room on your TM drive and it'll tell you you have to delete things from your working drive for it to start again. But if you want to do it, here's how:
1. Connect your two drives and launch Disk Utility.
2. When the drives show up, click on one of them and initialize as an HFS+ volume with journaling enabled. Name it as you like for your working drive and initialize. Do the same for the other one and call it "TimeMachine" (with no space - just to be safe). You should now have two Mac volumes.
3. From the Apple in the upper left, choose System Preferences, Time Machine. Turn it on and select the TimeMachine drive as your disk.
4. Here's where it gets goofy (imo). Click on Options and you get a window for "Do not back up" (seems really awkward to me). If there's anything you don't want backed up (drives, folders, files, applications), click the '+' and then search for those items to add. Time Machine will skip them and not back them up. If you use Aperture, be certain that you add your Aperture Library to the Do Not Backup list because TM can corrupt it if it's open during an hourly backup. Click Done, quit System Preferences and you should be good to go.
The first time you start Time Machine should be right before you go to bed, because the first back up can take several hours. Our 500 gig drive required about 8 hours to back up under with a USB drive.