Flash or Hybrid Hard Drives will increasingly challenge conventional hard drives - but not at high capacities.
This is a rather interesting question, as there have been several developments that clearly blur the future of mass storage. On the one hand, there have always been so-called "solid state" drives. Traditionally, these have been hard-drive-like products created with silicon memory and some sort of battery buffer. These products are extremely fast, but they're likewise expensive and exclusive, and so not suitable for the mainstream. But there are two technologies threatening the traditional hard drive domain: Flash hard drives, which are based on non-volatile Flash memory, and so-called hybrid hard drives (H-HDDs). The latter are traditional hard drives that also have an additional Flash memory bank that can be used to store OEM application data or frequently used operating system files.
Hybrid hard drives are meant to speed up system startup by reading from the Flash memory instead of the slower mechanical medium. The latter can also be disabled when the hard drive isn't required to spin. Flash hard drives such as the SATA5000 by Sandisk aim to replace all moving parts by fundamentally faster Flash memory lineups, which became an option due to continuously increasing Flash data densities.
However, hybrid hard drives suffer from immature operating system support. At this point, hybrid hard drives do not deliver substantial benefits, whether in the form of longer battery runtime for notebooks (the hard drive spindle motor can be shut down as long as the hybrid hard drive operates with its Flash memory) or by delivering better performance. At the same time, buying a hybrid hard drive instead of a conventional one certainly isn't a bad thing. It is certainly the way hard drives are going, but it will take time once they're supported before they finally make some sense.
Flash hard drives will get better and better with every generation. While early models are limited to 32 GB for cost reasons, and they still haven't beat the conventional hard drive in many benchmark segments, the upcoming generation will deliver data rates that compete with the latest 7,200 RPM desktop drives. The only issue that cannot be solved by smart engineering is data density: Flash hard drives will be limited to 64 and 128 GB for the time being - unless you're willing to spend four digit amounts on a hard drive that still won't even hold as much as current notebook drives at 250 GB. But accelerated Flash technologies will eventually find their way into Hybrid Hard Drives.