The size of an internal-bay device is given by two figures: the "size", or form factor (usually 2.5", 3.5" or 5.25", but occasionally other values), and the height.
Wikipedia has a list of hard disk drive form factors. According to that table a 3.5" HDD is 146 mm long by 101.6 mm wide, or just under 5 3/4 inches by exactly 4 inches, and may be either 19 or 25.4 mm (just under 3/4 inches, or exactly 1 inch) high. Your HDD matches this and thus is said to be a "3.5-inch form factor" drive, or just 3.5" for short. As you can see, there is no direct relationship to any external measurement.
This is largely because the 3.5" and 5.25" form factor names trace their lineage back to the floppy disk sizes that were used with drives that had the specific form factor. For example, 3.5" floppy disks were 90 mm (about 3.54 inches) wide and were normally used in what came to be referred to as 3.5" form factor drives, which thus had to be slightly wider than 90 mm to safely and properly accomodate the media.
As for height, you commonly see half-height and approximately-quarter-height devices these days. A standard optical drive for mounting in a desktop computer is most often "half height", and this is generally the tallest single bay that modern computer cases allow for. Quarter height would be 20.6 mm high, which is slightly more than the slimmer 3.5" form factor. These terms compare to the original IBM PC floppy disk drive (here is an image of such a PC with two floppy disk drives), which was a "full height" device. Compare Wikipedia's article Drive bay and particularly this comparative image of different drive bay sizes. 2.5" drives are commonly much thinner than quarter height, and their heights are often just given in exact measurements instead. For example, the Intel 530 SSD is described by my online retailer of choice as a 2.5" form factor SATA device with the dimensions width 100.45 mm, height 7 mm and depth 69.85 mm. 2.5 inches is 63.5 mm; again, there is no direct relationship to any external measurement.
