Some aspects of the discussions here:http://www.bleepingcomputer.com/forums/t/124083/xp-boot-defragmenter/http://www.bleepingcomputer.com/forums/t/125394/diskeeperlite/
may relate to your question.
In my observation, it's not unusual for defrag to simply leave blocks of free space, as they will be filled up in due course as new files are placed onto the drive.
Also, with NTFS and XP, defrag doesn't necessarily have such a high priority for moving files to the start of the drive. With the FAT filesystem, the FAT is fixed size and in a fixed location at the start of the drive. So having system files at the start of the drive gives a double-barrelled advantage - data transfer rate is greatest at the start of the drive, and head seeks between the FAT and file locations are minimised.
With NTFS under XP, the location of the MFT is not fixed, and Microsoft found a significant performance boost if metadata files were moved about 10% into the partition. Off the top of my head I'm not sure if this can be done with an upgrade from Win2k, but it's a possibility that the MFT zone is actually located in part of the first "empty" space. The MFT zone also contains a protected area to allow the MFT to grow, so no files will be allocated that area.
I agree with your conclusion that the free space early in the drive is probably where the original Win2k installation was. It's also possible that the XP boot file optimization will over time observe the file usage pattern and begin to transfer system files to a different location, as discussed in the first link above. However if the MFT isn't at the start of the drive, a position close to the MFT may be where they are placed rather than physically at the start of the drive.
I suggest continue to use the computer normally, allow idle time after periods of 3 days for the boot file optimization to work, defrag periodically as you normally would, and see how it goes. Overall, the NTFS file system is rugged enough to be left to its own devices with just basic maintenance measures such as these, and an occasional run of chkdsk.
Edited by Platypus, 22 March 2008 - 09:01 PM.