Xbox Live Arcade is growing again. This time, however, the growing has nothing to do with adding new titles, but instead it has to do with the total size that titles can be going forward. In the past Microsoft has capped Xbox Live Arcade title at 50MB, and then increased it on a case by case basis, and then increased it again; now Microsoft is confirming that they are limiting Xbox Live Arcade titles going forward to a 2GB cap, which is about 40 times what the original cap was when the Xbox Live Arcade opened.

Our sources tell us that the 2GB limit is a hard cap and it can’t be overcome without significant changes to XBLA, as it has to do with a technical limitation that currently exists in the XBLA file structure. While the 2GB limit is said to be final by the company, it is said that with the 2GB limit, it should offer more than enough room for developers to be creative and push the limits of what is possible in an XBLA title.

While the recent release of Shadow Complex came in at 835MB, which is still less than half of the new 2GB limit, it does seem to confirm Microsoft’s claim that developers still have plenty of room to grow. What is obvious, however, is that larger hard drives will become more necessary in the future with the larger XBLA titles and the Xbox Live Games on Demand titles, which will also consume large amounts of disk space.

While Microsoft did announce a new 250GB hard drive recently as part of the new Xbox CODMW2 Limited Edition Elite Xbox 360 console, Microsoft claimed that they had no immediate plans to make the hard drive available to those that wanted to upgrade. Our sources are telling us that you can expect an official announcement of a larger hard drive to arrive next year. While our sources had suggested that this news would arrive in January at the Consumer Electronics Show (CES), we are now hearing that Microsoft might wait until mid-year at E3 in June to make the announcement. In an interesting twist, it seems that Microsoft has not decided that the new larger hard drive will, in fact, be 250GB in size; our sources have confirmed to us that Microsoft is still considering a 320GB model, as well.

Also, look for decreasing availability of 60GB hard drives, for those are predicted to dry up by the end of the year. Our sources have confirmed that Microsoft has ordered more 120GB hard drives, but has apparently told retailers that they will be getting no more 60GB hard drives when the current inventory runs out, as we have previously reported.

The 60GB hard drive was introduced shortly after the NXE upgrade when it was apparent that the 20GB hard drives would not be enough storage in the longer term for most users. Microsoft moved to offer refurbished 20GB hard drives to those users that needed space before the NXE upgrade, while closing out the 20GB Xbox 360 Pro system and replacing it with an Xbox 360 Pro system that offered a 60GB hard drive. Shortly after the 60GB drive introduction in the Pro system, Microsoft made it available as the standard upgrade path for Xbox 360 Arcade users that wanted to add a hard drive; but it did not include a transfer cable for those that wanted to upgrade from a 20GB to 60GB drive, which put a premium on being able to obtain the transfer cable and software if you wanted to actually upgrade. The 120GB hard drive offering continues to be the path offered for those wanting to upgrade.