To save room on my internal drive (which will no longer be necessary after the drive upgrade), I tried putting my Windows Vista & Linux Parallels VMs on an external drive. I have two bus-powered 2.5″ external drives: a SmartDisk FireLite 60 with a FireWire connection, and a Western Digital Passport 120 with a USB 2.0 connection. Even though the FireLite is a 4200 RPM drive and the WD is 5200 RPM, I find that the FireLite is dramatically faster. It took about 3 minutes to copy a 6GB Parallels HDD file to the FireLite and over 5 minutes with the WD. Resuming a suspended Windows VM took about 2 minutes on the WD and less than a minute on the FireLite.
Unfortunately I find the FireLite unusable because of the high-pitched squeal it makes, which gave me a headache for several hours after I used it. I may try putting the WD drive into a Firewire/USB enclosure and connecting it via FireWire.