I didn't see anything about a grub bootloader
I don't have Ubuntu 10.04 but on 10.10, the Allocate Drive Space window shows Boot loader at the bottom left and also has Device for bootloader installation. It usually shows /dev/sda as the default which would be to the mbr of the first drive. Since you have another drive with xp on it, that would probably not be the choice you want. If you want your windows bootloader on the mbr of its drive and Grub on the external drive with Ubuntu you would probably need to select sdb. You can click the down arrow to select Device for bootloader. That's just a guess as we don't have any drive/partition information.
It would probably be a good idea for you to boot your Ubuntu CD, go to the Applications tab and find terminal, click it to open and get drive/partition information with this command: sudo fdisk -l(lower case Letter L in the command) and post that here.
Are you using text-based installer? Probably won't have the option above. Don't know as I've never used it.
You do remove the CD before rebooting??