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I'm a little skeptical about calling this the world's smallest external hard drive, but whatevs. This isn't Guiness. This is more a USB-key than anything else, but it has a 4-GB hard drive inside and is about 2.6 inches long, so I guess it qualifies.

Japan-only at this point and it should sell for $220 and has built-in security.

Elecom MF-DU204G World's smallest external Hard Drive [Newlaunches]