Hi jj_400.
Windows does need some free hard disk space to operate properly.
I have heard it needs at least 100 MB free.
It uses this free space as virtual memory so if your hard drive is almost full there is less space for Windows to store temporary files.
Also check this link for advice on changing the virtual memory ( paging file ) size -
http://www.resellerratings.com/forum/t110246.html
and
http://www.theeldergeek.com/paging_file.htm
and from -
http://mywebpages.comcast.net/SupportCD/OptimizeXP.html
4. Set A Static Page File Size
Virtual Memory acts like a second source of RAM. When you run low on Physical RAM your PC uses an allocated space on your hard drive to increase memory. Virtual Memory is much slower than Physical RAM. Windows XP is set to use a dynamic Page File that will resize during system operation consuming resources. A good rule of thumb is to set the minimum and maximum to 1.5 times the amount of Physical RAM you have. This works well as long as the 1.5 total is not greater than 512MBs. Any larger and it might even slow your system down. If you have over 512MB of RAM set the page file to 256MB.
Tweak - Go to "Start", "Settings", "Control Panel", "System", "Advanced" tab, in the "Performance" section select "Settings", "Advanced" tab, in the "Virtual Memory" section select "Change", change the "Initial Size" and "Maximum Size" to the same size then select "Set" and "OK".
Notes - If you are getting low memory errors then you need to add more RAM to your PC. Increasing the Page File to accommodate the low memory situation should only be considered a temporary solution. Using additional Virtual Memory over System RAM will reduce performance. It is a good idea to have at least 512MB-1GB of RAM in a PC today. A simple test to determine if you need more RAM is to use you PC for a whole day without rebooting, then look at the Task Manager (Ctrl-Alt-Delete), Performance tab. If the "Commit Charge - Peak" is ever higher then the "Physical Memory - Total" your system could benefit from adding more RAM.
Take care,
Linda