Source http://spong.com/detail/news.asp?prid=6253

Microsoft has signed up flash memory manufacturer M-Systems to develop a high capacity memory unit/storage device for Xbox 2, further hinting towards the idea that a built-in hard drive may be dropped.

M-Systems, best know for devices like pen and keyring-based USB flash drives, has stated that it is developing and entirely new product - something that will vastly surpass the capacity of the current Xbox’s 8 MB memory unit. Take into consideration Microsoft’s previous indications about how it's considering scrapping the hard drive, as well as the fact that solid-state storage technology is just around the corner for the PC, and it does all kind of point towards the idea of one huge-yet-tiny portable storage device.

Current keyrings and pens can store up to half a gigabyte of data and it’s certain that both companies will be aiming for a much higher target capacity than this. Subsequently, the need for a built-in hard drive becomes less and less. 1+ GB is easily enough to store plenty of game saves, downloaded content and other media, the only foreseeable issue would be keeping the device within the consumer’s price range.

Details will undoubtedly emerge in due course - we'll bring you them as soon as we can.