Say for instance you buy a 300GB hardrive. Like mine, when you plug it in, your Bios will see it as 300GB or most bios's should anyway.
When you go to Install XP from your CD, during setup the program will check the new drive, but will only see 130GB's of it, thats all Windows XP setup will see.

Once XP is completely installed and running, you can actually setup the rest of the drive, make sure Service pack 2 is in etc, You go into Computer management, then disk management and setup up the rest of the space on the new drive for windows to see it.