Hardware recommendations for running a VM on an external drive

"You want eSATA for this; it will run at or near the speed of an internal SATA interface. Firewire's your second best choice. USB will work, but USB is never a best-performance option.

Check out this article for help finding a good CardBus card. It indicates very poor performance on some laptops' Cardbus controllers (note the Ricoh controller in the Lenovo and Dell X300). The combination of controller+card is the determining factor, so do some research on your laptop and see what cards are reported to work well with your controller."

I'd say a solid state drive is out since you said you "could just use the space" and that would blow your budget of a "few hundred bucks". ESATA is by far the fastest connection, so get yourself that ESATA adapter and a nice big drive. The drive doesn't have to be a 10-15K RPM screamer. I run VMs just fine off a 7200 RPM, 1TB, ESATA Hitachi, no problem.