Xbox 360 owners rejoice, documents obtained by Joystiq reveal Microsoft is planning to add USB Mass Storage Device Support via an update that is expected to be released this Spring. There are some limitations though, the USB drive must have at least 1GB storage capacity, of which 512MB will be occupied by a system partition, and the consumer partition can't be larger than 16GB. Upon inserting a USB storage device, consumers are offered two choices: "Configure now" or "Customize". The "Customize" option will allow you to preserve some pre-existing data, such as music.
Once the update occurs, Xbox 360 owners will be able to download Xbox Live Arcade games, Xbox Live Indie games, Games on Demand, DLC and Title Updates to the storage device. "USB storage devices may, however, have far greater memory capacity than MUs (at the date of writing, the largest MU is 512 MB), and may therefore support previously infeasible operations-such as installation of a full disc-based title." That's right, you can also store disc-based games to the USB device; however, it will require the disc to be in the tray for authentication, identical to the current functionality.
According to the document, the USB mass storage device must be at least 1GB and the system will do a compatibility check. "The system partition occupies 512 MB of space, and by default the consumer partition occupies the remainder of the device capacity, or 16 GB, whichever is smaller."