Microsoft confirmed today that on April 6, there will be a system update for Xbox 360 that will enable it to save content via USB flash drives.
Any USB flash drive with anywhere from 1 GB to 16 GB of space will be compatible. The flash drive has to be either formatted to work or you can select the amount of space that Xbox 360 content will take up. Any and all content on Xbox 360 can be stored on the flash drive. If you need even more data, you can put in up to two flash drives at once into the console bringing it up to 32GB of maximum storage.
Microsoft has confirmed that they are discontinuing their Xbox 360 memory units in which all models had less than 1 GB of space. Microsoft will partner up with SanDisk to release an Xbox 360 branded USB flash drive this May.