Replaced 500GB Hard Drive with 120 GB Solid State Drive - Dell Data Safe Local Backup says I need a hard drive of at least 465GB

DataSafe Local is a for purchase product that has a free version which is included with your Dell computer.  As is typical, the free version lacks some of the features provided by the paid for version.  One of these features is the capability to adjust the size of the partition to which data is being restored.  Since you made your DataSafe Local image from a 500 GB partition, you must have a 500 GB partition to which to restore.  I don't believe there is anything you can do about this at this time unless your old drive is still working well enough to make a new back-up.

A word of caution with regard to solid state drives; these drives have certain requirements to keep them working in top condition, and simply restoring a back-up made from a standard rotating platter hard drive may not make the changes needed for proper healthy SSD operation.  You would be better off performing a clean installation of Windows 7 as the setup application recognizes the SSD and can make the necessary adjustments automatically.

Dell Data Safe 2.0 will only restore to a drive AT LEAST AS LARGE or LARGER.

Unless you get a 500 to 1000 gig drive it wont restore.   IT WILL NOT RESTORE To a smaller drive.

If you want to use an SSD you could get a crucial M4 500 Gig SSD and it would restore but those are VERY expensive drives almost $1000 each.