Not sure. I remember reading online about some gamers complaining because at one point MS did something that prevented 3rd party memory devices from working on the 360. Don't know if that has been corrected or not.
Yes, this has been changed. With the system update that happened a couple months ago, they are now allowing you to use any USB device to store stuff on. So, any old flash drive or old USB hard drive will work. They limit it to 16GB of storage though, so even if you use a 2TB drive, it will only allow you to allocate 16GB for Xbox use.
Plug the device in, and then go to the
"System Settings" section on the Xbox. Now go to
"Memory" and you should see the device you just plugged in. When you select it, it will ask if you want to configure it for Xbox use. It will then give you a slider so you can choose how much space to allocate, again, up to 16GB. Then it will run a check to make sure the drive is capable, and then it will format it. At that point it will just show up in the list of available
"Memory Units" on the Xbox.
I have done this with an old 2GB flash drive I had laying around. I elected to use all of it, and after it was formatted, it showed an available 1.4GB of space. I then just copied all my game saves from my Elite's 120GB drive over there. That way, if my HDD were to ever fail, I at least have all of my saves backed up. The only issue I had doing this was that 2 of my games (Forza 2 & 3) wouldn't let me
"copy" their save, they would only let me
"move" them. I'm not sure why they wouldn't allow this, but since they aren't games that I play regularly now, so I just moved them anyway.
Overall, the process is very simple, and works exactly like it should. Plug a drive in, format it, and use it as you would any other storage device. It works very well.