Excellent news harley!
Forget the master/slave lark with Serial ATA - they are not setup that way.
The drive you cannot see in My Computer will probably need setting up and formatting.
Go to Control Panel, then Administration Tools, then Computer Management. Look for the Disk Management - you should be able to see your third disk in there. You can set it up as you need it.
Microsoft have a useful Tech Note about it:
How to use Disk Management to configure basic disks in Windows XP
The 127GB limit is due to not having the Windows Service Packs installed. I'm guessing your Windows CD is an original, no Service Packs?
Install the Service Packs, then go back to Disk Manager and resize your drives.
Be careful with the drive if you have data on them that you need - dont delete the partitions until you have backed up the data.
Do be aware that you won't be able to resize your active Windows partition.
To do that, you will need a third party tool such as Partition Magic, or build a slipstreamed Cd with the Service Packs already installed, and reinstall Windows.
All very confusing!
Install your service packs and see how you go....