(OK, second, no third, fourth, fifth, sixth attempt at posting - I think I'm hitting another CS bug
)
Sorry, I realise now I wasn't very clear.
When I said flash memory card, I meant an Xbox 360 memory card. These don't plug into a USB port, the 360 has specific connectors for them. As it's a proprietary interface, expect to pay, even 2nd hand, significantly more for a 360 memory card than for a regular flash drive. (ie, roughly 64Mb 360 card for same price as 2Gb flash drive). You do raise an interesting question about whether a regular USB flash drive would work to store the download, and I don't know. But I wish I'd thought of that before buying my 360 memory card.
For the video playback, the 360 has two interfaces to choose between: the Media Centre Extender interface looks (much) nicer but will only play DVR-MS and WMV files. The 360 dashboard interface will play WMV, divx, xvid and h.264 format files, using a streaming network protocol called UPnP. If you've already got WMP11 installed then it will happily talk to the 360 and stream videos from your WMP library to the 360.
Out of the box the 360 will play the MS video formats, though both interfaces, without any memory card being added. If you want to add divx, xvid and h.264 formats to the dashboard interface then you need a download that the 360 will fetch itself.
That file needs storing on either a memory card or a hard disk. So, whether you need a memory card or not depends entirely on what video formats you intend on watching.
I hope this clears things up.
MCE2005 (Will go with the Win7 public beta when available) | AMD64X2 3600+ | 3Gb Ram | 1.5Tb HDD | Hauppauge PVR150 | nVidia 7300LE silent GPU | Pig ugly big black case | Dead DVD drive | Virgin Media cable | Xbox 360 wired extender