I'm currently running Windows Vista Ultimate from a 1 terabyte Maxtor drive (on a 50gb partition).
The only reason I didn't try a smaller drive first is that I didn't actually *see* the alleged "restriction" until after I had installed Windows and got it all set up.
I did have the same problem that other people have mentioned; ie. Windows Vista setup not finding any drives during the initial install, but I found that by simply restarting the install a couple of times (after completely restarting the computer) the Vista setup eventually found the drive.
No big deal all in all.