Hi there!
You're misinterpreting your OS. "Warning low Disk Space" means that your Hard drive is running out of space. You may have used up over 90% of the drive capacity, or even more. XP is complaining because it uses a lot of HD space for things like your pagefile, and system retore.
The Pagefile is what your applications will use (as well as windows) when you run out of physical RAM. This is a special space on the harddrive that only windows touches in such conditions. If you are not a heavy gamer, then a page file size can often be well over the needed amount. here's some options if you want to tone down your page file size.
Here's what you do. Click on the StartMenu, go to control panel. Switch to the classic view version of Control panel (as it is off by default). Double click on 'System'. Under the "Advanced" tab, click on the settings button inside the "Performance" box. Move again to the advanced tab. At the bottom there should be a Paging file box, click on "Change". Now select "Custom Size" radio button and enter something like 512MB. As long as yo uaren't a heavy gamer, this should be just fine.
I also recommend toning down the System Restore option aswell. Go to system again, and under the 'System Restore' tab set it to something around 1000MB, less if you prefer. My experience with system restore is that it never works right, but it'll hapily take up your harddrive space.
The final step is to do a little house cleaning. Under the control panel, select Add Remove programs. Go through the list and remove any prgrams you don't use anymore. Now head into explorer. Right-Click on the start menu, and choose 'Explore'. WHen the new window pops up, do a search for things like *.mp3, *.mov, and other file types often downloaded. Remove the ones you don't want to keep.
This should help clean up the drive enough to get rid of the warning.
NOTE
This is on the C:, not the newly installed D: with windows XP. In order for WIndows XP to boot, it needs to be the master drive, and not the slave. CUrrently it should stil be loading into Windows ME. If not, something may have gone a little crazy.
Hope this helps some