Outlook stores each of it's folders as a separate dbx file in it's default directory (or whatever directory you have moved it to).

I would set up a third local folder called archive, make sure it's not being set up on the hotmail server, but as a local folder. Move all the messages you want to archive to that folder and delete them from the other one. Then move the archive folder to CD or whatever. Delete the archive folder, shutdown and restart Outlook Express, it will see that there isn't an archive folder and just make an empty one. When you want it back, shutdown Outlook Express, copy it back, restart, and all the messages will be there.