I successfully upgraded the HDD in my PS3 last night from a 40 to a 120GB!!
Here is how you do it!
First, find a compatible 3.5 SATA hard drive (like the hdds found in modern laptops)
Backup any game data, demos, music, movies, etc... to a thumb drive (or an external usb hard drive if you have a lot of stuff)
next, using a PC, download the latest firmware update onto your thumb drive as explained ==>http://www.us.playstation.com/PS3/About/SystemUpdate/pc_update.html#update_PC
turn the ps3 system off... flipping the switch in the back.
remove the old hard drive. There is a little cover on the left side of the unit covering it... you do not need a screw driver to pry it off, just ur finger nails. Remove the blue screw and pull.
insert the thumb drive with the updated firmware and the new larger hdd.
turn the unit back on, and follow the instructions on the screen. (press Select and Start, blah blah blah)
restore all your game saves back onto the ps3 and you are ready to go!!!