A simple search of Google comes up with some good answers and potential fixes. Here's that search:
Google Search for "DEFRAG004 error"
Hope this helps.
Grif
Anyone know what causes DEFRAG004 error? I can run scandisk with no problem, but not defrag. I'm running win98se.
Thanks

Chowhound
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GameFAQs
GameSpot
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TechRepublic