So, Memory (both Physical and Virtual) are used as a place to work on files/data/etc.

Back in the day, computers only had a very small amount of Physical Memory (special chips plugged into the motherboard), so there a computer user could not multi-task very easily (aka the mechanic could not work on multiple parts at one time) then you would get errors that said "no memory available".  So to get around this, the user would have to close down the program or file they were working on to open something new.

To overcome this issue, Virtual Memory was created.  Virtual Memory is nothing more than the computer creating a file on the Hard Drive and calling it "memory".  The computer then knows that it can move files/data/etc to this space when Physical Memory begins to fill up. The computer then knows to move data that is sitting idle in Physical Memory to Virtual Memory when it is necessary.

So, when you receive the error you are getting, basically your computer is saying that it has no more Workbench to use as it is all filled up, as such, you need to free up this area.  Since this message is memory related, it is not likely related to the hard disk(degrag, cleanup, etc) unlss your drive is filled.

I suggest two things:

0. Backup your most important files before performing any further steps - just a precaution.

1. increase your virtual memory size: http://www.microsoft.com/resources/documentation/windows/xp/all/proddocs/en-us/sysdm_advancd_perform_change_vmpagefile.mspx?mfr=true
I suggest setting the virtual memory setting to 1.5X to 2X the amount of physical RAM in the system.  So if there is 1GB of P.RAM, then set the V.RAM to 2GB.  NOTE: the page to set the V.RAM shows the avialable disk space.  Don't use it all up as you will need space to write files and for your computer to work. (there are many arguments surrounding setting the page file, which I won't get into here - you can either let Windows manage the size or set it to a specific amount - your choice)

2. Disable unneeded programs from running in the background.  Your computer has many programs, like Antivirus, running in the background.  An easy way to see this is to look at the following tool: msconfig
http://www.online-tech-tips.com/cool-websites/msconfig-windows-xp-vista/
click the StartUp tab to see what apps run at startup and decide if you need them.  You will have to use Google to research some of them listed as they may not have a friendly name.

3. Do step 2 might lead you to find applications that are considered unsafe/malware.  As such, you may need to use some cleaning techniques to get your system running smoothly again.  Even if step 2 doesn't find any malware, its worth a shot to scan for it using a tool called MalwareBytes:
http://www.malwarebytes.org/

4. Add more Physical RAM.  I save this for last as it costs money, requires opening the computer case, etc.  Use this as a last resort, but know that RAM is one way to give your computer more ability to multitask in general, so it is normally a worthwhile upgrade regardless of any issues you may have.