|Is the 500gb hard drive showing up in the bios as larger than 128gb ? (It will be shown as it's binary size, which is smaller than 500gb, if it's being detected correctly).|
What XP Pro disk are you using ?
Does it have at least SP1 updates integrated into it ?
One that came with the same computer, or a different one ?
If it came with a different brand name system computer model, it will probably NOT run Setup - that's as intended. You're not supposed to be able to use an (OEM) XP CD that came with a brand name computer with anything except the same model, to install Windows from scratch, or to run a Repair installation of Windows.
If it's not one that came with the computer, is it an original disk or a copy of one ?
If it's a copy, it may not read properly in a drive it was not made in, more likely if it's not a CD-R.
A regular Microsoft OEM XP Pro CD, or a copy of one, will work to install Windows, along with the (OEM) Product Key that's on the official Microsoft label on the outside of the computer case.
A regular Microsoft OEM XP Pro CD has "For distribution with a new PC only." printed on the CD and the Microsoft holograms.
The XP Pro version of the CD must be the same - 32 bit or 64 bit - as that of the Product Key on the official Microsoft label in order for the key to work with it. Most people are using the 32 bit version.