Taken directly from Joystiq-Link
"Documentation obtained by Joystiq – and subsequently confirmed with two separate sources – reveals that "USB Mass Storage Device Support on Xbox 360" will soon be a reality. The document, authored by a senior software development engineer at Microsoft, states that due to "increased market penetration of high-capacity, high throughput USB mass storage devices, a 2010 Xbox 360 system update" will allow consumers to save and load game data from USB devices. The update is purportedly coming in Spring 2010. Once the update occurs, Xbox 360 owners will be able to download Xbox Live Arcade games, Xbox Live Indie games, Games on Demand, DLC and Title Updates to the storage device. "USB storage devices may, however, have far greater memory capacity than MUs (at the date of writing, the largest MU is 512 MB), and may therefore support previously infeasible operations-such as installation of a full disc-based title." That's right, you can also store disc-based games to the USB device; however, it will require the disc to be in the tray for authentication, identical to the current functionality"Well this all sounds great but there is a catch - No matter the size of the USB the maximum usable amount of memory is 16GB - not the greatest however still a lot better then the crappy sized Microsoft memory cards. This will most probably spell the end for the Microsoft memory card business but I don't think there ever was a big one anyway - I just wonder if they will try and put any limitations on using the memory stick on a computer and transferring your profile and items across - as we all know what that leads to!
It's still to early to say but I for one am glad to hear its finally being implemented - I get tired of having to carry my Memory card around just to play on my profile, but A memory stick is usually with me all the time anyway.
"If you're intent on circumventing Microsoft's cutthroat hard drive pricing the Xbox 360, you can use two USB storage devices for a maximum of 32 GB of usable storage; however, the console "has a fixed limit of two external USB mass storage devices" regardless of whether they're "formatted for the Xbox 360 or not." If you fill all three USB ports on the console, only the first two to be connected will be recognized."