Netbook.
My Acer Aspire One 8.9" with XP, 160GB HDD, and 1GB RAM was $200 for a refurb about 9 months ago. I assume it would have Windows 7 now for about teh same cost.
I use it all of the time at home for e-mail, Excel, Word, etc. I also have an HP 13" Core 2 Duo laptop that mostly sits, I don't use it much.
Hyperdrive at Amazon (mostly from Adorama):
Space 40GB - $120
Space 120GB - $250
ColorSpace 40 GB Photo - $225