I'm running Win XP SP2 and last night started experiencing some serious issues.
At midnight my AVG (free version) started running its daily scan and I went to sleep. In the morning, I went to my pc to power it down and noticed an error which I should have written down exactly but it resembles this: "Cannot create file D:\$n"
Explorer was visible and everything _looked_ fine, but I was unable to activate "My Computer" and I also could not reboot from Explorer... both functions simply timed out.
I forced a power off by holding down the power button. When I tried to reboot, I got past the BIOS but after that windows never loaded. I observed that all the hard drive lights were on, and the green monitor light was on, but nothing more. I did not hear any unusual sounds from the hard drives.
If anyone has any ideas how to troubleshoot this I'd much appreciate it!

I've never seen anything like that before, but you'll probably do better with that question at PCApex