if you go to cocoontech dot com and search for 'eco4 hard drive replace' it's got a step by step process. (or google search, it's the first result)
i did it myself and it's not too difficult.
remove hard drive from DM, and plug it into a desktop, use a 3rd party utility to format it as fat32 (since windows won't do anything above 32gb) .. then place the zip file (or 2 files from the download) from dedicated micros onto the drive. Don't UNZIP it, the DM Sprite 2 unit will do that and setup the files / directories.
it should boot up after that.. also make sure you have the jumper set to MASTER or SLAVE on the correct hard drive (though i'm guessing it's the master drive you're swapping out, so set it to master), having it as CABLE SELECT will cause that error you're getting as well..
if all else fails (as it did with me) return the hard drive and get one with a 8mb buffer.. DM units are notoriously picky as mine wouldn't work with a newer drive with 16mb, but worked with an older 120gb drive i had laying around with a 8mb buffer.. my solution was to just buy dual 320gb drives with 8mb buffers, since they're not as hard to find as a 500gb one, and not much of a trade off since you're losing a lot of the storage space of the 500gb one from having to use it as fat32..
hope this helps!