Despite the official Xbox page containing outdated info, the Xbox Live update from a couple of weeks back didn’t just add IE and Xbox music, but also enables players to store up to 32GB of storage on a USB flash drive. The prior 16GB limit certainly allowed for some flexibility if you were paranoid about your 360 dying and something happening to your data, but it would take quite a few drives to back up all of your data, which negates the savings of 16GB drives going for next to nothing now.
For $20, you can get a good thumb drive from Amazon and back up a good chunk of your hard drive in one shot. It’s not exactly perfect, and the best solution would definitely be external HDDs being supported, but it’s at least better than it used to be. As someone who has a white 360 and fully expects it to die at some point soon, it does feel good to know that I can back everything up on flash drives for a fairly small price and know that it can carry over instantly to a new, slim 360.