There shouldnt be any problem working while defragging, although obviously your work will go slower since the disk is thrashing. The files you have open will be locked, and wont be defragmented, but that shouldnt be a big deal unless you have dozens of apps open, and even then it shouldnt effect much in the scheme of things.
XP isnt like 9x, where every little disk access restarted the defragmenter. XP is smarter than that now.
Usually the only thing that will trip up the defragmenter will be disk errors, which it *should* pick up on, and will tell you to do a chkdsk (the XP version of scandisk).
Which defragmenter are you using? The one that comes with XP, or another one?
You shouldn't have to close down any of your applications. The MS defrag APIs allow even files that are open for use by other process/applications to safely be defragmented online - the MS defrag APIs take care of all of the low level I/O synchronization that has to happen for this to occur. There are only a few exceptions: the page file, the hibernate file. While people are used to shutting down apps under Win9x/Me in order to defragment, this is NOT the case with Windows NT 4, Windows 2000 and Windows XP.
- Greg/Raxco Software
Disclaimer: I work for Raxco Software, the maker of PerfectDisk - a commercial defrag utility - as a systems engineer in the support department.
If you run Diskeeper, then set it to run every day... I run it and it's done within a couple minutes (the first few took some time to complete). I have my temporary internet files on a ramdisk too which helps keep fragmantation down.
The longer XP stays on a system, the better it runs. Avoid Norton's Speed Disk for now because it's my understanding that it conflicts with XP's native optimization cycle.
With Diskeeper I was pleased to notice that I could still use my computer and performance was only marginally affected while it was running... I even had my Mp3 player going and never skipped a beat