Actually I have Win98 (lite) running on a 256MB CF now. There's things I want to add into it that will exceed 256MB and it's really not a great idea to keep creating, updating and deleting temp files on the CF.
My obvious choice is indeed a hard drive. I don't particularly want to get into soldering, buying a cable, etc. I could spend $30 on a USB drive case and like you mention a cheap HD and just plug it in.
Better still would be having the ability to use a smaller, cheaper CF card and put most of the stuff on the HD. I could use that card for my camera! I can probably move stuff to the new D: drive, reducing the CF size down to 64MB or less, I have a 48MB I'd love to use for this.
So the question remains, has anyone added on a USB external "secondary" drive?