Flash drives need to be at least 1GB in size, and can be as large as 16GB; while support for something like an external USB hard drive or a flash drive larger than 16GB has been hinted at, only 16 GB of said hard drive will be usable. You are also able to use up to two flash drives at once on one console, for a grand total of up to 32GB of extended storage. Also, when deciding what size flash drive to use, keep in mind that when you format it the 360 File System does use 512MB for system information (meaning that using a 1GB flash drive will only have approximately 488MB of free space to store games and data).
Microsoft has also partnered with Sandisk in order to release Xbox 360 branded flash drives. These drives will be preconfigured to work with the 360 out of the box, meaning no formatting, and will come in 8GB and 16GB sizes, retailing for around $34.99 and $69.99, respectively. Anyone with an eye for this sort of thing will know that this is a good price for a flash drive of this size...when they were released seven years ago. A walk through Best Buy can get you a 16GB flash drive for under $40 if on sale, and some web searching could get you one even cheaper. In order to soften the blow, the drives will also come with 1 month of Xbox Live gold.
All of your data will be transferable to any USB device you choose, except for installed games: Games will need to be re-installed directly to the USB device. Games installed on the USB device will function the same as games installed on the hard drive, meaning you will need the disc in the tray on start up. Well, there you have it, some info to try and keep you in the know. What are you using your USB drive for, if anything?