The trick to defraging is to do it in safe mode. Windows defrager generally works fine when done this way also. Reboot your machine and as soon as the bios screen goes away start pressing the F8 key until you see the advanced option menu. Choose safe mode, press enter. Choose your operating system (shouldnt be but 1) and press enter again. Click Yes at the pop up window and start your defrag again. You should have much better results.
Are you sure your reading it right? Is it possible that its saying you only have 2% fragmentation?
Analize the drive then click view report, you should have a window like this:
This machine is in desperate need of a defrag, total fragmentation and file fragmentation are pretty high.
I think that Absolutpepper has nailed it--not enough space on the drive to defrag.
On Internet explorer, go to Tools-->Internet Options-->Advanced-->and scroll down to Empty Tempory Internet Files and check the box. Open Internet Explorer and close it.
What you need for spare disk space, is about .8 to about 1.2 gig for a good defrag to work
Try downloading CCleaner to run a disk cleanup. Maybe you can also try some other defragger, out of the freeware tools i like this one the most, maybe u can try it if u want to.. Diskeeper Lite
http://www.majorgeeks.com/download.php?det=1207