you can run 160 GB harddisk in PIII.
1)first check in BIOS. if it is detecting 160GB there,then you need to fix LBA in your OS.
if bios is detecting 127 GB ,then you need to update your bios.
(if your operating system is using "36 bit LBA" then maximun harddisk size it can detect is 137.4 GB.to detect more than 137.4 GB ,the OS need "48 bit LBA")
2)download "EnableBigLba.exe" its size is 156 kb and its freeware. run it and it will make LBA 48 bit. reboot.
3)or to manually do it.
* regedit
* HKey_Local_Machine\system\current Control set\services\atapi\parameters
* find "EnableBigLBA" there and change it value to 1.(if it is not there,write it and make its value 1)
* exit Regedit and reboot.
(note: installing new SP2 patch can also fix this problem.)