The reason you only "see" 127Gb is because XP doesn't support drives over that size. So when you installed XP, it could only see and format that much of your drive. only after the release of SP1, it would fully utilize the larger disc sizes.
You can go into Computer management and format the unallocated space and use it as a storage partition. I'm not sure if you can extend you current partition into the unallocated space being as it has the OS on it. Partiton Magic may do it.
To avoid this problem with future installs, you can slipstream XP and SP2 into one install disc. That will alow it to see the entire drive during installation. One of the best programs I have used for slipstreaming is called AutoStreamer