I'd argue that Apple would probably put the OS on a 64GB SSD flash drive for speed and maybe stick a 80GB - 160GB 1.8" HDD in there for space to cover all of their bases. They'd also need to make sure that the OS turns off the HDD whenever it's not in use. It should be small enough to stick into a sub-notebook and maintain excellent battery life and with the optical drive probably gone, space won't be much of an issue.
Most computers attempt to achieve the same feature set, in a different package. Apple is a rarity in that it likes to break molds. A small hard disk will have a huge number of people saying "who the hell would want that", and another large group of people saying "wow... so small... and yet, this does what I need".
In fact, in terms of breaking the mold, I sometimes wonder if an Apple ultraportable would more likely be based on extending the iPhone design (a 12 inch screen, add a keyboard and the iLife/iWork suite), rather than simplifying the MacBook design.
As someone who needs a large hard drive on my current laptop (Macbook); may someone kindly inform me what sort of people would need this sort of ultra portable laptop (due the space limitation of current flash memory)?
Some people need a large hard drive, some don't. Many don't realise they don't need a large hard drive.
I think to get away with 64GB (or 32!), Apple would need to somewhat redefine the way we work with out data. For instance, if we're going to work with iPhoto, iTunes etc - I believe it's crucial that the laptop could have a subset of our iPhoto/iTunes. Just as your AppleTV and iPod can sync only some playlists & albums, and update later ... an ultraportable would need to be able to sync a subset of music & photos from your master library. We'd also need a subset of our working documents.
There are several ways Apple could do this
1) have a 'main' Mac with all your data - connect locally and via "Back to my Mac".
2) Bundle 100GB of iDisk storage with the ultraportable. Store everything at Apple!
3) Leave an external firewire disk at home/work with most of your data (perhaps plug it into your Airport for a "Back to my Disk")
4) Store everything on an iPod Classic, and sync from the iPod to the portable instead of the other way around.
5) a hybrid of the above might be a home media/data server
It could be quite functional. It'll be very interesting to watch!