Yes. There were some early problems with FreeAgent, but I think that's no longer a concern. You can put a drive in an enclosure and plug it into the USB 2.0 port. Some prefer to use HDDs meant for DVR/video use.
Yes. WD AAKS series or Seagate DB35 series internal drive in an external enclosure. I STRONGLY suggest this route. Many people have reported eventual problems with off the shelf drives, mostly because they were designed mostly for data storage, and not video playback. Plus, their plastic enclosures as opposed to heat dissipating aluminum.