I've used 3 different ones and they all have worked ( Crucial Gizmo 2GB, a Kingston Slim 8GB, and a Patriot XT 8GB ). Just make sure you use one with fast write speeds or you will really feel it!
I ran some benchmarks on those 3 USB drives and posted here: http://plugit.dyndns.org/wordpress/?p=50.
And that blog is running on a pink Pogoplug with the Patriot XT 8GB USB drive.