The Xbox 360 is reportedly going to allow gamers to use USB sticks instead of memory units in the near future via an update. The change could help Microsoft make a "slim" edition Xbox 360.  (Source: Joystiq)
USB format won't offer true HDD alternative, though

Consoles have long used proprietary memory units of various flavors to store data such as gamer profiles or savesgames.  Gamers have had to stomach a mess of memory cards that change between every console version and every company.

With the latest generation of the console war Nintendo and Sony adopted a common PC standard (SD cards) as one of their storage formats of choice.  Microsoft on the other hand not only didn't support SD cards, but it lately has delivered updates that lock out third-party memory units.

However, Microsoft may finally be seeing the light when it comes to adopting mainstream console storage.  According to a 
Joystiq report multiple sources have confirmed "USB Mass Storage Device Support" will be coming to Microsoft's Xbox 360 this spring.  The support will come via a system update.

The good news is that the USB update should not only remove the necessity to buy Microsoft's overpriced storage units, but  it will also grant users access to higher storage capacities.  The highest capacity memory unit to date released from Microsoft has been a 512 MB unit.  The USB update reportedly will support up to 16.5 GB of space on a USB drive.  

You will have to specially format your USB drive so that the Xbox 360 can make use of it.  That formatting will drop a 512 MB sector onto the drive containing the system partition.  The remaining space -- which can be up to 16 GB if you have a big enough drive/USB stick -- can be used like a normal memory unit.

Microsoft will be offering both a clean overwrite, which will wipe any previous info on the USB drive, and a "Customize" option that will allow you to preserve info like music files currently living on the drive.

While the USB inclusion will certainly be welcome, don't expect it to entirely replace Microsoft's pricey hard drives.  As mentioned, only 16 GB is supported, and there's a limit of 2 USB storage devices (for a maximum of 32 GB).  This is more than the 20 GB hard drive that shipped with the original 2005 Xbox Pro, but nowhere near the current 120 GB capacity hard drive, making it an impractical HDD replacement option for many gamers.

What the move does do is allow Microsoft to cut the memory unit ports in future iterations of the Xbox 360.  Microsoft is reportedly considering doing precisely that when it looks to release a "slim" Xbox 360, similar to Sony's PS3 Slim.

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