I've seen a couple threads where people are struggling to get 2.5'' hard drives working. This short tutorial will hopefully get everyone's problems sorted out.
I have my 100GB 2.5'' drive working with my AVIC-F700BT. The drive is a 100GB Seagate 7200.1 in an aluminum generic 2.5'' SATA enclosure. Pioneer says it works with up to a 250GB drive, but I haven't tried anything larger than 100GB yet. Your experience may vary.

First what you'll want to do is get proper power to your drive since the AVIC only supplies <500mA over the single USB data cable. You can find the tutorial on how to power your drive here: viewtopic.php?f=34&t=24072
First I started out by booting into TEST MODE, aka Windows CE mode. If you don't know how to do that, start here: viewtopic.php?t=17542
That brings us to Windows. Once it's done loading, plug in your 2.5'' hard drive and let it initialize. Then proceed by tapping the start menu.

Go to Control Panel.

Go to the Storage Manager utility.

At this point, look at the picture below and follow the instructions:
1. Select your drive. It should be "DSK3: USB Hard Disk Drive", or something along those lines.
2. Hit the format button. It will then format your drive for FAT32 recognizable by Windows CE according to your hard drive volume size.
3. Make a partition.. I just called mine "100gb". You should then see the "USB Disk" pop up in the File Explorer.

When you're done, go ahead and shut down the unit and take your drive back to your computer to load it up with music and movies.
Now you can go back to your car and test it out. I'm still running into the problem where I can't get the drive to initialize from a cold boot. So, I have to plug it in after the AVIC unit boots up. When you plug in the drive, it may take 30 seconds or so to be recognized. I think it all depends on your folder count, because it has to index everything to the AVIC software.
Now your USB icon should light up on the sources menu, and music should start playing. Done!