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http://www.joystiq.com/2008/10/10/nxe-requires-128mb-space-ms-to-offer-storage-solutions/
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http://www.8bitjoystick.com/archives/jake_lots_of_details_on_the_xbox_360_dashboard_nxe_via_rare.php
If you do not have a Hard Disk (XBOX Arcade Console), you will still be able to recieve the update... however any cached data will be removed upon shutdown/restart of your console. So for those with limited bandwidth we recommend aquiring a Hard Disk. Currently the 20GB model is available for about the price of a game, so might be worth picking one up now if you don't already have one.
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All of the resources on NXE, particularly via Marketplace will download at varying quality levels to allow for quicker loading times on slower connections or at peak times. Everything is also cached to the Hard Disk, meaning once it's on your XBOX itself it will load instantly until updated on LIVE using no additional bandwidth.
It's also been said that Microsoft's online service 'cloud' OS would be used behind the scenes to manage streaming/updates of the interface
http://xbox360.ign.com/articles/917/917760p1.html
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