When the XBox 360 first came out, the hard drive that came standard – at least on the higher up model – just seemed like it wouldn’t be enough. After all, with all the DLC that Microsoft was planning for the console, there was no way that 20GB would be enough. The upgrades kept coming along, Netflix was added, DLC got bigger and bigger … Well, you know the result.

So Microsoft decides a little while back to offer a 250GB drive for the 360, and decided to price it at $129. Even the most expensive 250GB drive on NewEgg is still $30 cheaper, and the pricey drive just feels like a slap in the face. Why not just allow people to plug in their own USB drives and do whatever they want with storage? Well, now you can, per Major Nelson.

We’ve just released a system update for the Xbox 360 over Xbox LIVE.

As previously announced, this system update contains support for USB Memory storage devices.

Sometime over the next few hours when you sign in to Xbox LIVE you’ll receive a prompt to accept this mandatory update. If you are signed into LIVE already, you may be signed out and asked to accept the update and you’ll be back online in a few moments.

So what was previously announced? Here’s the good stuff:

On April 6th, we will be releasing a system update over Xbox LIVE for your Xbox 360 that will allow USB flash drives to be used for storing profiles, game saves, demos and more.  I’ve been testing this feature out for a few weeks, and I have to say it’s really great. Once you take the system update on April 6th, you’ll be able to connect your USB flash drives to your console and head over to the memory section to configure your new storage device. Once you do that, the system will conduct a one time performance and integrity check to confirm the drive is working properly. You will then be able to configure how much storage to use on the device, up to 16 GB. The remaining space on the flash drive will be accessible by your PC or Mac. USB Hard drives may work, but like flash memory, you’ll only be able to use up to 16GB of space. Since performance on flash based USB storage is usually better, I highly recommend using flash based instead of spinning media like a hard drive…it’s just going to give you a MUCH better experience.

Nice. I will say that the 16GB limit sucks pretty hard, but hopefully they’ll start upping the limits soon. That way the 360 can become a true home media server, without any extra hacks.