Is there a limit on how much hard drive space a computer can handle? I'm thinking of getting a new SSHD for my early 2011 13" MBP, and if I do, I had the idea to give my 500GB HDD to my friend who has a 2007 MacBook (white polycarbonate). He seems to think that his computer can only take 80 and 120GB hard drives. Is this true?
The only limit would be with the format/filesystem the operating system uses.

You should be fine to put in whatever size drive you want, as long as it physically fits and uses the correct interface (e.g. SATA vs PATA).