From the Stereophile article -
"Because most of the brains and all control of communications are taken care of by the Squeezebox Server program installed on your host computer, the link between it and the Touch is critical (footnote 1). Using an Ethernet cable will ensure the best and most reliable performance. But heck—if I were willing or able to run a wire from my PC to the stereo, why would I need the Touch? It could be replaced with some sort of remote control.
Footnote 1: The Touch differs from earlier Squeezebox devices by being able to operate without a host computer. When a USB drive is plugged into its USB port, a version of Squeezebox Server program that runs on the Touch itself is launched, and allows you to browse the music files on that drive in the same manner that you can on a host PC via the network.—Ed."
So you could hook a external hard drive directly into the SB Touch.