I can't help but think that you read one of those cryptic Microsoft articles dealing with the file format of the hard drive.
By default the HD file format on an XP system should be NTFS, unless you or whoever built your system changed that.
One quick way to find out is by opening the Disk Defragmenter. In my case (I have a 200GB hard drive) it says:
File System: NTFS
Capacity: 186 GB
Free Space: 51.65 GB
%Free Space: 27%
Note the Capacity entry which has always been 186 GB despite me having a 200GB HD. In other words the Capacity remains constant, regardless of me adding or deleting files on my HD.
Even if you purchase your parts per mail order it can take time for the company to reply to your e-mail. I would simply ring up a computer-part store downtown and pretend I'm interested in a particular size HD they're selling and then... oh by the way Sir, I only have XP not Vista.
The guy on the other end will be very quick to clear up the mystery.
On the other hand, you could just make do with your current HD and buy an external HD instead. They are dirt cheap these days and using them is a breeze. I got a 500GB Western Digital a few months ago and can't remember how I managed without it.
All the programs you want to run will easily fit on your 120GB internal HD. All other files such as .zip for your sim or movies, pics and pretty much anything else can go onto your external HD.