Well I never! I have always figured MS for being pretty stingy with storage space, but in light of recent moves by Yahoo to provide more storage space (up to 100MB) it looks like Microsoft have followed suit and offered 250MB.
"The domino effect Google started in April by announcing plans for a free e-mail service with 1GB of inbox storage continues, with Microsoft promising on Wednesday to boost Hotmail inbox capacity to 250MB from the current 2MB. The storage increase for Hotmail will be rolled out starting in July in the U.S. and other countries, says Lisa Gurry, director of Microsoft's MSN Internet division."
Other improvements include the ability to send attachments up to bigger sizes (10 MB) and better virus protection.
More here.