A post on the Xbox Team blog seeks to clarify what exactly the system cache clearing code will and won’t do on an Xbox 360 system. The official Microsoft line on this code is as follows:

The HDD cache clearing feature is a part of the Xbox 360 technical support process and is only supported in those instances. While the cache clearing operation will not harm or render your console inoperable, it should only be used when instructed by the Microsoft customer support staff. As always, any gamers experiencing any issues with their console should contact 800-4-MYXBOX instead of attempting to troubleshoot on their own via this feature.

According to Indiegames, the cache clearing code:

• Will clear out the temporary copies of achievements and gamertiles on Memory Units or Hard Drives (note these get re-downloaded when re-connected to Xbox Live)
• Will clear out Game Updates stored on Memory Units or Hard Drives. (note these will get re-downloaded when launching that Game while connected to Xbox Live)
• Will not clear out system updates.
• Will not clear out the game areas of the hard drive where game titles cache their own information

So, the cache clearing code may help some users in certain circumstances with Xbox Live Marketplace content, but certainly does not seem to be a way to troubleshoot problematic games, since they apparently store their information in a different area of the Xbox 360 hard drive.

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