LSCopy job fails on SQL Server 2005 - Insufficient space
The destination path for the LSCopy job has to be an UNC Path for all practical purposes, to make things simpler to debug I would reccomend not to use the default \d$ shares as you will have to change the permissions on them but connecting to \localhost\c$ is a network connection. Now the error


  ***Error: Not enough server storage is available to process this command.


Is an operating system error. but not an error from the SQL Server. You are probably starving the computer on memory or having some network issues, If on Windows Server 2003 a quick reboot of the secondary server will fix this temporary and then I would look into memory settings on the server