Not sure about the PS3 Slim, but I have an old PS3 and I changed my HDD from 40Gb to a 120Gb (which is more than enough for me).
So you can easily put a 500Gb if you wanted to but just remind this when choosing your new hard drive:
-It has to be a 2.5\\"
-Prefer a 5400 rpm to reduce heating compared to a 7200rpm HDD
A good choice would be something like this one : http://www.amazon.com/Western-Digital-Scorpio-Drive-WD5000BEVT/dp/B001JSSDGU/ref=sr_1_5?ie=UTF8&m=ATVPDKIKX0DER&s=pc&qid=1268729882&sr=1-5
To replace it, you can find many tutorials showing how you can do it yourself and as I did it, I can tell you it is quite easy :)

Regarding the rumor, never heard about that.

would replacing the HDD myself void the warrenty? And even if I could without voiding the warrenty on my PS3. Does that mean I could put a terradrive in there as long as it was 5400 and 2.5, even they even make them or would I have to send my PS3 into sony for that?

From what I read on the net, it does not void the warranty.
About the Tera had drive, not sure if the PS3 can handle that big drives, at least 500Gb is supported.
Quite easy stuff:
-Backup all your data on a USB external hard drive (there is an option in the console menu to do that automatically, see here : http://manuals.playstation.net/document/en/ps3/current/settings/backuputility.html).
-When it is done, turn off the console and unplug it
-Remove the side cover
-Remove the blue screw
-Extract the hard drive
-Remove the screws from the hard drive
-Replace by the new hard drive, put the screws back
-Mount the new hard drive into the PS3
-Put the blue screw and the cover back
-Ready to start to restore your data

You can find some video like this : http://www.youtube.com/watch?v=BkM9wiZePfs