George,Umapati,others
The SB Touch works extremely well while streaming music from Windows PC/Apple or a NAS from brands like Netgear/QNAP/Buffalo. Perfect for folks who have a good modem/router/isp. But a Computer+SB Touch uses up plenty of bandwidth, leaving room for possibly one more computer being used for normal surfing.
To keep your broadband free for other requirements, you need to use an external hard disc drive. Online forum talk seems to suggest that Logitech is working on a software update to fix issues which users have been facing with a USB drive. The problem seems to be that the Squeezebox server downloadable on a Computer/NAS is a 'full version', but for a USB drive there is a 'mini' version built into the Touch. The mini version seems to work fine as long as the USB drive has limited amount of data on it but it becomes sluggish and unresponsive as you add more.
This is the issue that umapati is going to face. Well you have to face it buddy. Because you bought the drive in a hurry, without doing elementary research on the net

. I am only telling you what I have read on SB forums. Experience will be a better guide. But I feel that until Logitech updates the SB server on the Touch to a full version, you will need to restrict data fed into the USB drive to 10/20 % of it's 2 TB capacity.
Other issues which need to be known are that the USB drive to be used with a Touch, should have it's own power supply. If it draws power from the Touch through the USB connection, then it might place an even bigger load on the Touch. The drive should also have a power down option when not in use. And if you have a 'power supply' fixation ( like me

) then you may feel that the power line of the USB drive is degrading the SQ

. My SB Touch came with a US plug to which I thoughtlessly connected a converter.
The first audition was bad. Another cheap mass market product!. But then I removed the converter and connected the Touch to the universal wall socket receiving power from an online UPS. Bliss. And yes! The SB Touch needs a few hours of burn in before it opens up and you realise that
Logitech has a winner on their hands.
The option which some folks (who seem to have understood all the nitty gritties) appear to be preferring, is a 16/32 GB SD card. A minimalstic SD card for Linux based systems. The Touch seems to have issues with SD cards which are heavily loaded with Windows friendly softwares. Kingston seems to be preferred to to Sandisk. A 32GB SD card will place less load on the server built into the Touch. It will not require a power supply which could degrade SQ. And it would be handy to use.
Therefore the best solution would be to save your data on the computer or an external drive. And transfer 30GB of data on to an SD card for using with the Touch. 30GB should be good enough for 80-100 flac or apple lossless files.