Microsoft is updating the Xbox360 firmware to allow the addition of up to 2 USB mass storage devices (USB sticks). Each USB stick is limited in size from 1GB to 16GB and is required to be specially formatted with Xbox 360 utility.
Up to additional 32GB can be used to copy games to these devices, or saving Live Arcade games, movies, and downloadable contents
The update, reportedly will be included in the next April 6 firmware release.
Microsoft Major Nelson posted on Flickr showing the new memory management tools.