The ug_nios2_custom_instruction.pdf file in the documentation directory outlines the custom instruction.
Did you say that your application is going to reside in internal memory (no external memory)? If so, you might want to be carefull, because the HAL/IDE generates large code images that might not fit in the internal memory. Granted there are a bunch of things you can do to shorten the image, but I have found that the internal memory is just too small for medium-complex apps. If you need floats and/or printfs, you'll probably run out of memory.
Good Luck,
Rick