It's the best of both worlds for USB storage drives -- even more capacity, and shrunk to amazingly small sizes -- both at the same time!
The Sony Micro Vault Tiny is now up to 4 GB (coming this spring, price TBD) -- in a design which is basically a memory card with a vestigal USB interface (but without the USB connector).
And the Kingston DataTraveler Mini with Migo is just large enough to hold a USB connector, with a sliding retractable protective cap. It's available with 1 GB for $15, and up to 2 GB.
See more in the Portable Storage Gallery, under Flash USB Pocket Drives.