Go out and buy the 250GB HDD any ways. If you play games then it is always best to install them to the HDD - Its quieter, smoother and takes less of a toll on the CD drive. In the long run it will probably be worth it! When you beat a game and won't be playing it any more you can just delete the install, which will removed the bulk but keep your saved data. For the size of demo's and arcade games these days the larger drive is a must!
I haven't tried it on a USB stick (the one I got for my 360 keeps corrupting so I've given up on it for now) but when I installed the HD pack to my HDD it did give me a prompt to select the storage device, so it should at least give you the ability to install it to a USB stick.
The official statement they (the developers) gave was that they are required to put out games with the option of no-install, because microsoft sells xboxes without a HD. so ppl who do not have one, can still play the game on one disc but do not get the added textures in the game. that is the way I understood it.
the game is big. that much so a dual layer dvd is crammed and still not enough. welcome to the limitation of dvd. having said that its still as good as the ps3 version. but with the niggle of dumping hd textures on hard drive. but its worth it. you will be amazed. especially in 1080p. you will be gobsmacked. i was.
I have to admit after getting over it, I went out and bought a Hard-Drive and your right. The comparission is great well worth it and enhances my gameplay with surround-sound and 42" 1080i tv lol. Would of been nice of some notification that this is required but hey i'm over it now haha