You can use removable media storage devices such as those mentioned above when virtual memory is turned on, but they cannot be the volume on which the virtual memory swap file is stored. The operating system will not let you select a removable media for the storage of your virtual memory swap file. (For this reason, removable media are grayed-out in the Memory control panel.)
If you use a removable hard disk and a normal hard disk, choose the normal hard disk for the Virtual Memory swap file. If the only hard disk attached to your Macintosh is a removable one, you cannot use System 7's Virtual Memory feature.