According to leaked screenshot, Microsoft is planning on providing a firmware update to the Xbox 360 that will enable gamers to utilize an external USB mass storage drive for gaming and not just movies/music/etc. The update will support partitioned drives in addition to “DLC, XBLA titles, games on demand and general game updates”. But is Microsoft stupid enough to negate their 120GB hard drive, such as the one found in the Pro (was Elite) system? Nope. It looks like you can only share up to 16GB of stored Xbox 360 date on an external drive. The drive must also be at least 1GB in capacity, since the Xbox formatting/partitioning uses 512mb of space. Also what is not clear, is if copying games to the hard drive will be supported, though a quote from the source (below) seems to indicate so.
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.
But, before thoughts of wielding more than USB drive pop into your head, forget about it. Apparently, the update will only support up to two external storage devices. Very weak! Why wouldn’t Xbox 360 make it unlimitless and use that as a marketing angle against the PS3?