Cleaned up this thread a bit since a lot has changed in the last year.
ANY IDE drive will work in the Xbox. However, not all drives can be locked. To date, there has been no connection drawn between the characteristics of a drive and its capability of being locked.
The retail xbox kernel, and most hacked kernels use lba28 (logical block addressing) which limits the size of the hard drive to 137gigs (137,438,953,472 bytes)
Thanks to the great work by oz_paulb we can now use hard drives upto nearly 2.2tb (2,199,023,255,040 bytes)
In order for a retail MS kernel to boot, the xbox hard drive must be 'locked' to the xbox. The hard drive can be locked/unlocked with the Evox Dash (versions 3921 and up) and Team Assembly's Config Magic. Lockable Drives
Because of the nature of exploits / 'softmods', the MS kernel is what loads when you turn on the xbox, so in order to swap the hard drive, you must first lock the hard drive in a PC with your xbox's password.