Microsoft will soon be releasing an update to the XBOX 360 that will allow gamers to connect any USB mass storage device and save data.
As of April 6th, USB thumbs drives and USB external HDD will can be configured to the XBOX 360 formating partitions to a maximum of 16GB. I find this a small amount of space, however two drives can be connected at any given point allowing for 32GB total space.
Source: Gizmodo