Kernal Panic/Hard Drive Installation

I have a 24" A1225 iMac. I have recently suffered a failing hard drive (WD3200AAJS, 320GB). I bought a replacement from Fry's (and it was compatible to my machine, so they told me). Seagate 500GB. The drive is thinner. I went with Seagate because of my good history with the drives (WD , not so much). I installed the HD (simple) and carefully without any issues.

I formatted the HD, and installed a restore from time machine. Immediately (well, after three hours) installed without an issue.

Upon restart immediate kernal panic, one after another actually. I tried PRAM, SMC, AHT, and nothing. It boots right into this kernal panic, and even in safe/verbose mode. I took the drive out and I am now erasing and reformatting it with my other machine, and running some tests. I contacted three outside stores and two said that drive works with iMac, and OWC said it will NOT work with my machine. I can still return the Seagate and get a WD, however I am not sure the brand matters - anyone know?

I am not sure what the issue is now. I have checked logic board (fine), RAM (new and fine), and the new HD is not loading. I believe one of two things - 1) New HD is failing or 2) the time machine backup is corrupt. Any ideas or suggestions are appreciated.