You'll want to check this out too:
http://68kmla.org/forums/viewtopic.php?t=1982
System 4.2 is just outside the limit of what we think a 512K will run. You will also need to boot from a 400K MFS disk only. System 3.2 is your best bet here and you will not be able to use that 800K external drive without the HD20 INIT in your system folder. Unless you follow the instructions on this thread:
http://68kmla.org/forums/viewtopic.php?t=1492
Tom Lee's advice is excellent as I did not know that, since it works exactly the opposite way under System 6 and below. I assume when you hold down the option key when selecting erase disk, System 7 will automatically format a double sided disk as 400K MFS (one side only)? Guessing it won't make an MFS 800K disk.
FYI, the external 800K Apple 3.5 drive from an Apple IIGS will boot the 512K, but NOT the UniDisk 3.5 (unless you remove the controller card). The volume can be 400K or 800K, but it MUST be MFS.