I've debated whether or not you can do this without getting hammered by microsoft. I've flashed and installed drives into xbox's all the way up to 1TB. However, I do know that microsoft has a push protocol to report your total data saved on system (not the composition of data, only the amount saved). The only reason they would query that data would be to see what size harddrive you have - possibly for sales figures to report the differences between elites, mw2, pro, etc. If you go over 250GB... it would be completely obvious you're using a aftermarket drive. Would they care? I don't know, I personally wouldn't if I was them, but they do have the ability to check that.
16. Service Operation and Equipment.
The Service may only be accessed with an original Xbox, an Xbox 360 console, a personal computer, or other device authorized by us, or by logging into your account via Xbox.com . You agree that you are using only authorized software and hardware to access the Service, that your software and hardware have not been modified in any unauthorized way (e.g., through unauthorized repairs, unauthorized upgrades, or unauthorized downloads), and that we have the right to send data , applications or other content to any software or hardware that you are using to access the Service for the express purpose of detecting an unauthorized modification. Any attempt to disassemble, decompile, create derivative works of, reverse engineer, modify, further sublicense, distribute, or use for other purposes the Service, any game , application, or other content available or accessible through the Service, or any hardware or software associated with the Service or with an original Xbox or Xbox 360 console is strictly prohibited and may result in cancellation of your account and/or your ability to access the Service, and the pursuit of other legal remedies by Microsoft. Microsoft may take any legal action it deems appropriate against users who violate Microsoft's systems or network security ,this contract or any additional terms incorporated or referenced in this contract, and such users may also incur criminal or civil liability.
Damn, guess that kinda 'legally' limits the options. Haven't seen any mention of anyone actually getting banned, worst case scenario(not with hard drive) is the accessory not being allowed