Damn, I am sorry to hear that, but with the foremention use of MS software DL on your system, sounds like a preset setup by MS. Let me explain, if your system is still SP1, your system is being prepped by MS for SP2, there will be minor changes, like on your Window Update Menu, that gets a new facelift.
Judging from what you have stated on the space being 'eaten', it does sounds like the system is trying to prep files, and there is almost no space to use.
The virtual memory(all free space taken up by files) , the 128 memory, almost swallow by OS operations, in other words, you have deny the OS to function normally, and it is force to ultilize what is space there, is left.
RW, I am sorry, but the best bet, of two choices, remove all the non- important stuff, you will need to get a gig of space, and that is pushing it, or...new hard drive, with bigger space.
Sorry my friend, but that HD is done, but please check the spelling on those programs, which I did forget myself, on the letter mixup. I will be posting links (on a new thread) to sites that helps with program file description function, I hope that the mod can make it a stickie, in fact, anyone should post very Helpful links on that, but not before that software was tested by that person themselves(yes, you will have to police yourself, be honest...getting banned is not nice).
It will be up later, hopefully around 1:30 a.m. (sorry, work up to the midnight shift)
*fingers crossed for RW*