A retail 120GB hard drive for the Xbox 360 cost around 130$. That seems somewhat expensive to me since I can get a 1TB hard drive for that much. I did some searching and finally found an answer I could live with.
A "do it yourself" 120GB Xbox 360 hard drive upgrade for $50!! NO MOD CHIP IS REQUIRED!
DISCLAIMER: Do this mod at your own risk! You could damage your Xbox or your computer. You could lose your data, get banned from Xbox Live, void your warranty, the authorities take you to prison, Steve Balmer will hold you down while Bill Gates spits in your eye, yada, yada... Don't blame me if any of this happens!
Seriously, I did not have much on my hard drive that I would mind losing. This will void the warranty on the hard drive. I just paid for another 13 months of Xbox Live, so I was a little nervous... but I have not been kicked yet!
Some games have content and save games that are media locked. This means that it will not work if it has been moved to another media (new hard drive, memory card, etc.). I have not experienced it yet, but I have heard reports of it from others.