I agree get a 4 to 8 GB SD. But, there will be a few apps that don't work. I cant remember exactly which ones as I have been running an external drive for a while. I believe GXGeo, and one other don't have SDHC compatibility.
One benefit to an SD card in addition to an external drive is that I can run 2 different button configurations of the emulator. I have all my games on one, and my Street Fighter II button layout on the SD.
I went through a few SD cards that just don't work too. Make sure you check the compatibility list. I also had a few cards that conflicted with that list though. One that should have worked, and didn't, and vice versa. But your chances are better with the list.