1. In addition to what Guido said, please note that each hub is, in itself, also a device, thereby contributing toward the 127 count. Also, the hub tree can only go, at most, 5 levels deep.
2. USB puts most of the burden of data transfer and management on the host. A software stack has to be developed for the microcontroller (the host) to be able to enumerate hubs and devices as they are connected. After that, the host software stack then has to manage each and every transaction to/from each device. In a nutshell, a host stack is a very complex bundle of software.
In reality, you will never be able to connect 127 devices to a single host root port, let alone have them be functional. The burden on the host stack will be too great and will thus likely crash the host long before the 127th device is connected.
It sounds as if you need to learn more about the basics of USB, and the best way to accomplish that is from Jan's book, USB Complete (available on this website). And please feel free to continue to ask questions here.
