Hi Gosox13,
First off for your question... you only have 2GB of ram in your system... If you want to run Win7 (either 64 or 32 bit) with any decent speed you will want to upgrade to at least 4GB which I believe is the max for your system.
Windows 7 likes to have 2GB just for itself. Mac OS 10.6 will want at least access to 1GB, which leaves you with two choices... Give 2GB to the VM and your Mac side will struggle and beachball by constatntly struggling with caching... or give the VM only 1GB and watch Win7 crawl.
Keep in mind that whenever you are doing a lot of caching, your disk speed (esp. spindle speed) is very important. I belive the machine you have is a 5400 RPM drive. This will make caching EXTREMELY painful... and your disk will be your biggest bottleneck.
Using an external drive for your VM... keep in mind that this too will add a bottleneck. USB drives are going to be a bad choice for running a VM off of. Firewire is probably a best bet on that age manchine. Keep in mind that if you bump out the connection while your VM is running and you risk the chance of loosing the entire VM. Keep at least one good snapshot if you are prone to accidently disconnecting your external drive.
My last though on 32 vs. 64 bit... Unless you have any special software reason for it, don't bother going out of your way to run 32 bit software. You will just run into incompatibilites as the software world continues its march from 32bit apps to 64bit ones.
Hope that helps...
- Cheers, Peter.