News.com's David Becker is reporting that M-Systems, a maker of flash memory, is announcing that they've signed a contract with Microsoft to provide memory systems for future Xbox products.

M-Systems currently makes a line of flash-based drives called DiskOnKey. Their CFO, Ronit Maor, says in the article that what they will be doing for the Xbox is "significantly higher capacity" than the 8Mb memory modules used now to plug into Xbox controllers.

This, along with the addition of online storage as part of future Xbox Live plans, is being touted as a way to decrease Xbox production costs and reduce the liabilities caused by having a standard hard drive in the box (i.e. hacking and Linux). However, if the flash drive offers the same capabilities, I don't see how it won't get hacked, too, and if it doesn't, I don't see how this won't cripple the box.

Cost reductions are speculated to be driven by a desire to reduce the home and entertainment unit's losses, which were $394 million last year, down from $412 million the year before, according to News.com.

Thanks Blackstar for pointing this out.