Latest round of HDD price drops has 1TB going for around 200$ and under for OEM drives.
http://www.memoryexpress.com/Products
Or NCIX
http://www.ncix.com/products/index.p...bminorcatid=63
External storage can be just a USB 2.0 enclosure which can retail anywhere from 30-60$
and the apple time machine will have no problems recognizing external USB HDD's. Not to certain about Itunes though.