I remember about 5 years ago when I got my first mp3 player I went to get another 16mb flash card and it cost over £120 quid or so. Now you can pick up 512mb flash cards for about £50 odd quid.
Think about the millions of xbox 2's that will be made and 18 months + of technological advancement, which according to Moore's law means that the "technology" will have doubled in capacity in that time, and I doubt MS will be paying for than a couple of quid for each 1 gigabyte flash card they buy.
£50 will buy a 20Gb 2.5" notebook HDD or a 80Gb 3.5" HDD. Or flash memory £100 per gigabyte vs HDD £2.50 per gigabyte.
If flash memory does get really cheap great, I'll use it to build myself a silent PC but I cannot see that happening.
Flash memory is AMD's most profitable line at the moment. I don't think any firm making such memory will want to sell it cheaply.
Companies like Hitachi and Toshiba are now striving to produce ever smaller HDD platters so HDD's are only going to get smaller.
Capacity isn't an issue either considering the original Xbox only shipped with 8 or 10Gb.
I wonder what MS's angle is with the flash ram? Are they envious of the money Sony and Nintendo make selling memory cards? Maybe the flash memory is a buffer for games much like the Xbox HDD is just now. The Xbox 2 may even have save space on each game disc say a caddy with a small amount of flash memory.