I use an external hard drive by Iomega. which is pretty compact (4 1/2 x 3 1/4 x 5/8 inches), and powers itself from the USB port on my laptop. It would have been more convenient to replace the existing 60GB internal drive, or add a second one, but the price comparison made me put up with the inconvenience (and clunkiness) of the external drive.

I have everything related to BIAB installed on the internal drive EXCEPT for RealTracks and RealDrums.

I don't know how it compares with a USB stick as far as speed of data transfer goes, but the external drive doesn't seem to be the limiting factor - it's the CPU that slows things down on my computer.