This past Tuesday, a new System Update was released for the Xbox 360, adding USB flashdrive support as a storage option to the console.
In a nutshell, you can use any Flashdrive 1 GB or larger, format it on your console, and use it to store game saves, your Profile, or even install/download games onto. Each drive is capped at 16 GB for use with the Xbox 360, however, so keep that in mind if you plan on purchasing a drive. You can have 2 x flashdrives plugged into your console at one time, which means you can increase your storage space by up to 32 GB at once, and of course you can swap out additional flashdrives as needed.
Microsoft has also partnered with SanDisk to create a specific Xbox 360 USB flashdrive, which comes in the sizes of 8 GB or 16 GB, pre-formatted for the Xbox 360, and includes a 1 Month Xbox LIVE Gold membership. The drive will be available in May, and retail for $34.99 and $69.99 (US) respectively.
You can read Xbox's official FAQ on the new USB support here.
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