If you are keeping this computer you need to install a MUCH larger hard drive. Get a quote from a local computer repair person for the swap, as he or she will know exactly what to do. It's a multi-step process that can go very wrong.
If you let them buy the drive they recommend they will charge a little less for labor (or they might, anyway...) Research the cost for a Seagate or Western Digital 500 or 640 Gig drive and figure the repair shop needs to make some $$ for their time and advice. Do you know te interface for the drives in your computer now? If not you should definitely go the outside help route.
It sounds like you'd be better off not taking the time to figure out all the tech issues. The repair person can check other gear in the case like the state of your memory.
Just realize that computers take maintenance like cars. Not everyone is going to be able to do this themselves, especially if they don't want the learning experience of having things go wrong. Are you a hobbyist who wants to have wonky experiences and learn from them or are you someone who just wants to use their computer? Neither role is better, just different.
You must get more open space now on that disk to allow it to operate safely while you investigate your options. Do you have a CD-ROM or DVD burner? For right now, start making optical disks of data you don't need every day and erasing from the hard drive whatever you were able to archive.Another way to keep the drive going for a while: try defragmenting what you have left on that drive. You can use the Windows tool to do this overnight. I believe you get to the defragmenter by right clicking the drive in choosing Properties, then the "Tools" tab. (I am not sitting at a WinXP machine right now.)
Then read the messages here and do any other research you can about elsewhere about cloning your 40mb drive over to a larger EIDE (also called PATA) drive. This has dangers that could mean you lose the data you have accumulated.
The smoother alternative would be to take this moment to upgrade your home computer. There are so many (good) changes since the days when your computer came with a 40gb drive. Keeping one going can be a noble idea but - for instance - I just gave up after many [internal] upgrades to a late-2003 desktop with a 478-socket Pentium4 (I even upgraded to a way faster 3.4HMz processor in the existing socket). Now this will end up as a print server for my hobbyist color printer and I will finally build a current machine to join the modern world of faster image processing.
But back to your upgrade issue: you could go to a local computer repair store and learn while specifying what you want. Tell them what you can afford to spend and what the computer is used for. They will build it and you will have contributed to your local economy rather than some giant corporations tiny profit for nothing better than what you will have from the local "builder". If you pick your supplier carefully you will have an eager teacher and loyal repair source.
There are some tools out there for easier migration to a new machine, too.
Get others' advice, too, so you have lots of ideas to choose from. Good luck.
There is still not enough room to download movies from bitTorrent.
zemuron, movies are very large and your 40GB hard drive is probably really not large enough for what you'd like to do.
Your situation is like this: you have a bookshelf and it's full of books. Now you've just discovered that you can have widescreen TV sets and you want to get lots of them. Your bookshelf was fine for holding the books, but no matter how many books you throw out, you're just not going to be able to fit more than a few widescreen TVs in their place. What you really need is a new, much bigger bookshelf.
You can get drives that hold 20 to 30X more stuff than your current drive for less than $100.
Sounds like a good idea. As a last note, since no one else mentioned it, Treesize is a good program that shows files and folders in order of how much space they take up. Make sure not to delete anything unless you know you can, though. http://www.jam-software.com/freeware/index.shtml