Windows XP originally had a 127GB hard drive limitation, but that was resolved with SP2. There are manual workarounds, but to resolve that and patch several dozen security and stability issues I recommend just running Windows Update and downloading/installing all of the updates. (You can opt out of any you have an objection to.) Reboot and the problem should resolve itself.
Hope this helps,
Just purchased a brand new 320 gb hard drive, and proceeded to install Windows XP Pro on it. Everything was running smoothly until I checked the size of the hard drivel...it showed 127 gb.
I went into BIOS and that seemed to register 320 gbs on it. If it helps, I attempted to create a partition on the drive at first, and Windows showed it with one drive, and only 100 gb, the size of my partitions.