I think the best discussion that I found on placement of log files, data files and the system databases was in Kalen Delaney's Inside SQL Server 2000. There is also a good discussion in the MS SQL Server 2000 Operations guide.
You don't really provide a lot of information about the dbs to tell us whether the design is "good" or not. Things like, expected i/o, the underlying disk architecture (RAID level) of the associated drives, etc.
That said, it's never a "good" idea to place both the data file(s) and the log file(s) on the same physical drive; always separate these if possible. It's more important (in my opinion) to separate the data and log files than it is to separate the system dbs from the user dbs. Be sure, too, that the files are really on separate physical disks (not just separate logical partitions of the same underlying physical disk). There is a lot more to say, but others have said it better before me; read the references above and use common sense.
Have you hugged your backup today?