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Maybe it just boots up a small script that books 1TB in cloud storage somewhere :-)

or they licensed technology from this hd manufacturer: http://www.cracktwo.com/2011/04/chinese-fake-hard-drive.html :-)

Physically it should be possible; you have 32GB micro SD-cards, 32 of which take up about 5.3cm^3. That would be about the same as 1.5x5.0x0.7cm, which seems like something that would fit that knife.

They are not using any chips. It's vaporware.