|Windows 98 used FAT32 for it's filing which was much less efficient and there were many schemes to compress better. NTFS is already better, and XP's compression is about as good as it is going to get.|
Try a disk cleanup, and try reducing the space available for system restore a little. Both might help some, but as above, I would recommend adding another drive (internal is actually cheaper if it's a desktop) and moving all of your personal files, and even uninstalling some programs and reinstalling them to the newer drive (choose custom on install). You should be able to get an internal IDE drive for around $40.00 or so.