Major Nelson has officially announced the Spring Update for release on April 6th which will allow USB flash drives to be used for storing profiles, game saves, demos and even installed retail games. The information below was obtained from his blog.

Once the system update hits on April 6th, you’ll be able to connect your USB flash drives to your console and head over to the memory section to configure the new storage device. Afterwards, the system will conduct a one time performance and integrity check to confirm the drive is working properly. You will then be able to configure how much storage to use on the device, up to 16 GB. The remaining space on the flash drive will be accessible by your PC or Mac. USB Hard drives may work, but like flash memory, you’ll only be able to use up to 16GB of space. Since performance on flash based USB storage is usually better, it is highly recommended to use flash based instead of spinning media like a hard drive.

Memory Enhancements:

• You can have 2 devices connected to the console at a time, enabling up to 32GB of simultaneous storage.
• The system won’t just configure the device once it is connected to the console. You’ll need to head to the memory area in system settings, select your USB Device, and choose from Configure Now (Format and Configure the Full Device), or Customize (you can choose how much memory you want configured for Xbox360 from the free space on the device.)

While any flash drive can be used, Xbox LIVE are partnering with SanDisk to release an Xbox 360 branded USB flash drive in May that comes pre-configured out of the box and ready to go.

Source: MajorNelson