Flash memory maker M-Systems announced on Wednesday that it has signed a contract to provide storage products for future versions of the Xbox, bolstering speculation that Microsoft may ditch the game console's hard drive.

M-Systems, best known for its DiskOnKey line of flash drives, which attach to a PC's Universal Serial Bus port, said in a statement that it has signed an agreement with Microsoft to develop "customized memory units for future Xbox products and services."

Ronit Maor, chief financial officer at Israel-based M-Systems, said the company could not discuss details of the contract. But Maor said the devices under development would be of significantly higher capacity than the 8MB Xbox memory units Microsoft currently sells to save game and user data. "What we're going to offer for the Xbox doesn't currently exist," Maor said.

The M-Systems announcement comes shortly after Microsoft revealed plans for expanding Xbox Live, the online game service it runs, to include limited online storage capabilities. The combination has bolstered speculation that Microsoft will drop the hard drive from the next version of the Xbox to cut production costs for the money-losing console.

Microsoft representatives declined to comment on the company's plan for next-generation Xbox hardware.

Jay Srivatsa, a senior analyst at research firm iSuppli, said the Xbox hard drive so far has been used mainly for ancillary functions like saving progress in a game, not to improve the way games work. Sacrificing the hard drive could be a relatively painless way to trim $10 or $20 per unit from production costs. "I can see why they'd attempt to do that--the hard disk usage on the current Xbox has been pretty minimal," he said. "At some point, this has got to be a profitable business for Microsoft. They have to draw some lines; look at what can they take out."

The current Xbox will gain another storage option late this year, when Microsoft releases an "extender kit" for attaching the console to a PC running Windows XP Media Center, noted P.J. McNealy, an analyst at American Technology Research. That and expanded online features could obviate the need for a hard drive, he said.

"If the network is robust enough to handle some of the processing, and you have a fast-enough connection, you can push some of the functionality of the hard drive back onto the network," McNealy said.

Richard Doherty, president of research firm The Envisioneering Group, said adding recording functionality to the Xbox's DVD drive would be a cheaper way to provide storage than a hard drive and would rob hackers of one of their primary tools for making the Xbox perform unauthorized tricks. "The hard drive became a liability in relation to those units that were hacked," Doherty said.

Assuming this is what they decide to do with X2 (which I doubt will be it's primary option, since it's stupid), what if I want to take my X2 to a friends?

Originally posted by nemein
It still sounds like there is going to be some sort of flash memory card. The PC thing is going to be optional.

Originally posted by flashburn
Is Xbox2 supposed to have backwards compatiability? If so, no harddrive would cause some interesting problems with games that need one.

Originally posted by joshd2012
The industry talk right now is that it won't be backwards compatible.

Which is even worse than not having a hard drive.

Originally posted by funkyryno
Which is even worse than not having a hard drive.

Originally posted by tanman

So do you think the other two will forget about putting in a HD after MS troubles with it?

Originally posted by Trigger
This is a bad idea - a step backwards... if they are going to get rid of the hard drive. I have a feeling they are just going to be developing their memory card storage solution and perhaps xbox system memory. MS didn't make much money on memory card sales by including a hard drive, so I can see this happening. It's not good for the consumer. Certainly they aren't going to replace the HD with flash memory because that would be highly cost prohibitive. I'm also tired of hearing that the HD isn't being supported enough - it has been the best thing to happen to consoles since the memory card. I use it every time I use my xbox. Just because there's 500 different uses for a spoon and most people only use it for one thing, eating soup - does that mean they should stop making spoons?

Originally posted by Giantrobo
I also wonder, and perhaps you guys can help me with this because I may be way off base, did the Hard Drive on Xbox contribute to the Game quality in terms of graphic, sound, and speed? If it did then how will using flash affect these?