bc4 and Crashman are on the right track. Original XP Pro did NOT support 48-bit LBA, which is what you need to make a HDD volume over 127 GB. In order to install it in the first place, you probably Partioned and Formatted the HDD as the first step of installation, and the Partition step is where the size of the volume is set. Upgrading to SP1, 2, and/or 3 afterwards does NOT re-size the drive.
AFAIK, Windows will NOT allow you to expand the C: (boot) drive to add unallocated space, so you cannot do this in Disk Manger. (Note, though, that Windows Disk Manager will allow expansion on any non-boot volume.) I hear, though, that Partition Magic can do it for you. As Crashman says, the altrnative is to use Disk Manager to create a second partition in the unallocated space and use it as a separate drive. Since you have upgraded to SP3, the new partition will not be limited to 127 GB max.
Check the post by cjl in this thread:
http://www.tomshardware.com/forum/246631-32-removing-partition-adding-windows-partition
He / she details a command-prompt procedure under Vista that he says can expand even the C: drive. I have not tried it, nor do I know whether it can be done in XP.