Just upgraded mine to 320GB yesterday (WD SATA 320GB 5400RPM 8MB)

Tips:

1. Make sure you have an external HDD ready (formatted in FAT32)
2. Prepare proper screwdrivers (sharper the better). Those screws are machine-tight!
3. Prepare the latest PS3 firmware file (PS3UPDAT.PUP) because you'll need it for the first installation. Put it into a USB thumb drive or external HDD. Again, must be FAT32!
4. Backup using the Data Backup utility to the external HDD.
5. Replace the HDD
6. After replacing, plug in the USB disk or HDD that contains the firmware and press SELECT+START
7. Then, hold START for 5 seconds to confirm formatting the new drive.
8. Run the data restore utility to restore all the settings, game data, game saves (some games cannot be backed-up) that you have backed-up earlier.
9. Done. Enjoy your gaming on the new HDD.
10. If you have any games downloaded from the Playstation Network, you need to reactivate them again. (No need to redownload and install). Go to your Download History under the Account Management settings in your PSN menu, select the game that you have downloaded earlier, press DOWNLOAD. You will see the screen which says "Activating, please wait...". Once this is done, the download screen will pop up. In this step, you can just skip it because all you want to do is to activate the game. If you don't activate the game after restoring them from the backup drive, you will receive an error saying that the "Copy-protection information is invalid"