It usually means that Windows doesn't have enough 'hooks' left to 'hang' programs on, not that you've run out of physical memory.

If you haven't got heaps of programs open, or rebooting doesn't help get you going again, then it's probably an indication that there's lots of nasty 'internet intruders' on your system and you need to do scans for virus/trojan/spyware etc.

Sometimes programs which have been run don't properly 'let go' of memory, and lead to this error, but a reboot should fix those instances.

Try this:
Right click "My computer" -> Properties -> Advanced -> in the Performance panel -> settings -> Advanced -> bottom panel Virtual Memory: that number in mb's is the current size of the page file otherwise known as virtual memory. It should be for most users 1.5 times the size of your ram (if physical memory equals 128 mb, the page file should be 192 mb).
On the theory that its currupted, press the "change" bar -> in the next panel labled virtual memory tick the "no paging file" button and then the "set" bar, then reboot. This erases the current page file.
When the system comes back up, go back into that last panel and tick the "system managed size" button and then the "set" bar and reboot again.

Hi tayspen, check out this link on Virtual memory.
http://aumha.org/win5/a/xpvm.php
Somethings you cud check out are if ur HD is running out of space, if so run a disk clean up and defragment. The problems might be causd by what the Fry and Catweazle suggested, you cud anyways also rule out the chances of the paging file being severly fragmented (as u dont have too much RAM), if so you might need to defragment it using a third party tool.