"Insufficient disk space" is reported when using CONVERT.EXE to convert a file system from FATx to NTFS.

The problem may be bad sectors on the partition.

To check the partition: run CHKDSK [drive] /F /R If XP is encountering any bad sectors it will report "nn KB in bad sectors".

One work-around is to reformat the HD and do a fresh install. Just be sure to back-up the data first.