I just did the above, and it worked okay.
Formated C and E with slayers, and installed the original dash. Booted up PGR2 (running gthe M$ bios), and chose Xbox live / create account.
It installed the dash off the disc, rebooted, and got the new update. Sweet.
Now, the only trouble is, it tells me my PGR2 save is damaged

, even though i've transfered my entire E: partition back accross. I had that problem getting my save from my old Xbox onto my new Crystal one. I still can't remember how i solved it.
EDIT: Fixed it. Used SmartFTP instead of my expired FlashFXP.