Windows 7 and Parallels 6

I think I am told by Parallels that I do not have enough HD space to upgrade from Vista Ultimate to Windows 7 Ultimate.

If this is so, can I move Windows to an external Hard Drive? — I.E., the drive I back up on?

I am not the best at this stuff...

Where is Parallels and Windows stored? — I cannot find them...

Is there any one to help?

Thanks in advance...