According to some leaked documentation and confirmed with two Joystiq sources, “USB Mass Storage Device Support on Xbox 360″ will soon be a reality. The document is authored by a senior software development engineer at Microsoft, and says 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 apparently coming in Spring 2010. After the update, 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.
You can also store disc-based games to the USB device, but it will require the disc to be in the tray for authentication.