Engadget.com received a tantilizing bit of gossip in response to a post they made concerning the supposed lack of a hard drive on the Xbox 2.
The writer tells of a casual and chance meeting with J. Allard, the head of Microsoft?s Xbox division, at a bar in Whistler, B.C. According to the writer, he approached Mr. Allard, and their conversation turned to the Xbox 2. Allard explained that the current plan for the Xbox 2 was to not include a hard drive in the console. However, a portable hard drive will be offered to consumers. The kicker is that he went on to explain Microsoft was trying to "incorporate MP3 (and WMA, obviously) functionality into the portable hard drive and turn the thing into an iPod killer". According to the story, the portable hard drive would be sold as a loss leader at $100 each.
Remember, these are rumors, and, while they are pretty to think about, I can't imagine anyone at the Xbox division of Microsoft, particularly the head, being so loose lipped to someone they meet at a bar.