One of the E3 articles (I forget which one, I've read so many) had shown some pictures of the back side of the removable hard drive and said that AS OF E3 MS was planning on using a standard 2.5" hard drive with a custom (smaller footprint) connector to interface with the rest of the console.
As for the space available on 2.5" form factor drives I've seen them available in 12, 20, 30, 40, 60, 73, 80, 100, and 120 GB sizes. typically costing about $1.50 - $2.00 per gig.
If and when the box is hacked and they determine the formatting and locking schemes (if they're even special) it would be very easy to hook up a 3.5" hard drive in place of a 2.5" hard drive... in which case you can get the bigger sizes and lower prices. It might be ugly looking but who cares if you can get a 250GB for $100