Hi aboutit. An external hard drive would be fine, but so would an internal drive set as slave to your existing one. The size you need would depend on the resolution and format of the files. If you are using Windows XP, there is no practical limit to the size of drive you can use as long as your BIOS supports it (which it probably does). My 3.2Mp Sony camera produces jpg files of about 700k per picture, so 1000 pictures take 700M, or a 40G drive would hold over 50,000 pictures. Storing the pictures would have almost no effect on your installed RAM, it is only the processing of the pictures that is RAM intensive.
Putting the pictures onto another drive is as simple as drag-and-drop. Whatever location you are dragging the pictures from, I would select the pictures, Ctrl-C to copy them, then Ctrl-V to paste them to the new location, then delete them from the old location. This way I'm in control until I see the pictures in the new location. I would also recommend periodically backing up the photos onto CD as a safety precaution. Hard drives are very reliable, but they do occasionally fail.