ok, further research (i love google) proves i am wrong in some of what i believed - it is up to individual titles to manage the 750mb utility data storage regions of the xbox hard drive. Titles can choose whether they want an empty area, to automatically mount data to this area or to preserve any data that was there from a previous game (although this is obviously not guaranteed to be there). This would mean that if xbox 2 is to be backwards compatible it will require at least 1 750mb area of memory (either HDD, flash or RAM) for this functionality to still work in xbox games.
It also appears that games can use persistant storage (ie the save game area of the HDD) to store their own file structures etc which is something i was not aware of previously.. and which obviously changes things quite a bit!
I still dont think a lack of HDD will be a problem, as long as it is replaced with some equivelent amount of flash RAM or similar to recreate this functionality, but its clearly not as cut and dried as i had previously imagined!
so, in conclusion, er.. i take back some of my statements, but still stand by my argument that not having a HDD will not somehow make xbox 2 inferior to xbox
(/me makes mental note to check things more thoroughly before arguing in future)