It sounds like a communication problem, likely the SATA cable. When you get this message, the motherboard is not receiving any data from the HD. Try testing out several SATA cables. Also, try cloning the original to a new drive, then change boot device priority. See if this helps any...

j is right it is a communication problem between the MB and the drive. try to partition the 250 into 2 partitions with one of them being no more than 137gb and then try to install windows. SOMETIMES xp has a problem with partitions over 137gb , dont remember why..
when you use gparted use failsafe option or force vesa option (so there is no issues)

So I had a chance to try a few things out. I changed the SATA to Compatibility in BIOS so that I could run the Recovery Console without a floppy for the SATA drivers. I was able to do dskchk /r to fix the errors. After that, the drive starts to boot (I get the XP load screen) for about 2 second and then BSOD.. So at least it is booting now.

As for your partition advice, I dont want to reinstall XP. I was hoping that I could just clone the 120GB drive and then boom Id could pop in the 250GB drive and everything would be identical except with more HDD space..

You could try to put the clone image on a partition LESS THAN 137 GB . you would not have to reinstall anything since you have a clone.? as said in post #3 , :"SOMETIMES xp has a problem with partitions over 137gb , dont remember why.." please post back!

Here's the update:

I partitioned under 137GB but no change. Also, an added note, when I tried to use the Recovery Console to just setup XP it said it could not continue because there was no EULA (end user licensing agreement).. all the software is custom setup from the tech people here at my university. And NO, they said they could not upgrade me to the new drive, I have to do it myself...

After changing the drive back to AHCI, I still had BSOD but it said a .dll was causing the error. So I went back and forth booting and then replacing the error .dll until I decided to just copy and paste them all from my current C: to the new 250GB drive. BOOM no more .dll errors. Then, I got some .exe errors from the system32 folder again, so I copied every file in system32 over again, BOOM we have lift off. It boots up to the login screen.

So I am happy that I have made progres.. the problem now:

When I put in my password, it quickly changes to "Logging off.." and then goes back to the Login screen. I tried updating the userinit.exe file but no change. ANY IDEAS??

Just to update everyone, since the drive was booting at least to the login screen I went ahead and took it into our university IS department, which is very efficient and quick, and hopefully they will not realize it is a new or cloned drive. Hopefully they can fix it for me!