No, this is not confirmed, but bear with me as I have reasons for thinking this is likely.

Now, we all know Microsoft is launching it's "Games on Demand" service in August.  Well, the vast majority of Xbox users are still using the 20GB hard drive, with a much smaller percentage using 60GB hard drives, and even less using 120GB hard drives (yay I'm lucky!).  So, with this Games on Demand offering full "disc-sized" downloads of games, and starting out with a whopping 30 games which number shall increase weekly, doesn't it stand to reason that people will be needing more storage?

Sure not everyone will use the downloads as they effectively have no resale potential, and obviously this is a way to cut down on the traded games market that hurts developers, but with many people this will be a very nice option and they will download many of their games from here on out.

I myself will likely do this for games that I know I won't sell (games with immense online multiplayer mostly).

Now, with 30 games at the start, that's already a lot more full games than are available on PSN, so while PS3 hard drives are bigger, they don't necessarily fill up, but if you have a 20GB or 60GB hard drive, that's only enough spare room for 1 (20GB) to 7 (60GB) games.  And considering the large amount of games that the average 360 user buys, that space will be used up quickly.  I'm not going to delete a full game I bought just to download a new one.  A 120GB can hold easily 10-15 games before filling up (with some demos, videos, and arcade games also taking up some space).

So, what do you think?  Do you expect MS to update their hard drive offerings come August?  The did it roughly this time last year, right before teh price cut in September.  It is a well known fact that in hard drives, you pay for the platter, not how much data can fit on it, so the price to produce an 80 or 120GB hard drive is likely the same or almost the same as the 60GB.  What I think they should do is effectively bump everything up.  Make the 60GB a 120GB, and the 120GB a 250GB (or 160GB at the least).

You could be right, and this is definitely something MS could do for the holidays. Adapt the "more value for your money"-strategy rather than cutting the price again, and I would welcome this with open arms.

Can't you pick a better title if this is just blind speculation?

Gotta get people's attention don't I? 

Also, it's not just blind speculation.  There were many reasons and past examples to provide more support to this being a possibility.

I'll see if a mod can edit the title to add "to 'possibly' recieve" if that helps

I thought the same thing when I first heard about the Games on Demand. As it is now I don't have much space left on my HDD and I have an Elite.

Wow, dude.  I've got the 120GB hard drive and I have like 5 games installed and a a bunch of arcade games and still have like 70GB left.

I just wish they would stop with the insane premiums on the hard drives. They need to release at least a 500gb drive for $149.99. Even that is above price, but should account for some profit and enclosure costs.

I think MS will launch a new HDD when they slim the 360 down....If not look for a new HDD solution altogether.

They really need a 320GB solution. 120GB HDD prices, where I live, have been going down recently, and costs about $1/GB at my local Wal-Mart.

There is a diffence between the size of downloadable retail games vs. retail games. when you install a retail game to HDD, it copies all of the files, including dummy files. Your 360 isn't smart enough to determine which files can be left out. I'm pretty sure that the full games to be released for download will be stripped of these dummy files and compressed into a nice little package. They should take up much less room than normal HDD instals

This could be true.  I also like the options of using a 320GB or 500GB so long as they don't make such a premium on HDD prices.  They could also shange the storage all-together like mrstickball suggested.

I think they definitely have something planned as far as storage and I believe it will be released along the same time as this new Games on Demand and before the updated marketplace.