There is an (p)ATA hardware limitation in those model Macs that only allows a max size of 137GB on drives. If you have a large disk like that, you have 3 options.
1) Purchase a PCI ATA card that doesn't have the limitation.
2) Put that large disk in an external FW enclosure
3) Return the disk for a smaller one.
Yellow beat me to it...
🙂
It looks like your hardware it limited in the maximum size drive you can use.
Here is some more detail on the options you have...
Installing a PCI ATA Card
This would be something that you would have to purchase and install in your machine. Then your new drive would connect to this card. The new card would support the larger size drive.
Using your existing connection
If you want to go with an internal drive, you are going to be limited to the 127GB you see now. That means either keep the drive you have, or exchange it for a smaller one.
External Drive
If you are OK with an external drive, then get a nice firewire enclosure for your existing drive, or return your drive, and get an external drive already in an enclosure. Either one will work fine.
I guess it comes down to how badly you need the extra space, and how you feel about an external drive.
if you can accept only 127GB, then either stick with what you have or exchange your drive for a smaller one.
If you want the full 500GB, then you have to get an additional card, or go external.
You can get external enclosures at lots of places, but I like the ones at OWC
http://www.macsales.com. I saw some for $60-$80 for the enclosure.
If you want to get an add in card, OWC has a couple for about $65-$70.