The problem is simple: You have an XP installation disk with no service packs ==> thus it only supports 28-bit logical block addressing. This limits your hard drive size to 137GB (128GB in "computer-ese").
You simply need to create a slipstreamed XP install disk ==> you need at least SP1, but I'd do it with SP2 or SP3. THEN the installation disk will work fine.
Just follow the instructions here ...
http://www.winsupersite.com/showcase/windowsxp_sp2_slipstream.asp