The information you gathered i scorrect , you must dedicate your HDD too linux no other software on it. I don't know if you can or cannot do a save state with the live cd but i don't see why not. Everything will work old Xell .... it's not that it is unstable it's that regular Xell cannot be used with Xell launch too run at full speed. Everything will run at 700mhz with normal Xell.
Cancerous made a script that will let you install Debian Mint on the 360 I highly recommend that version.
check out
www.libxenon.org their is a lot more Xell/Linux information there. If you want to ask questions in the forums over there I will most likely get them faster.
I like the Mint too.. but it formatting a hdd doesn't sound pleasant, some of the guys on libxenon have figured out how to install a livecd to a usb stick also. And Tuxuser's latest Ubuntu livecd might be a better choice for some people.
OP, You're right tho that you may run into some issues using xell and linux on usb, but there is plenty of info to get you started on that site. I don't follow what you mean by fsd and linux on the same hdd tho...