I received this error when I tried to increase the memory of the single freshly installed VM (Server 2008R2) on my Hyper-V 2008R2 host from 1024Mb to 2048Mb. This is a new clean 4Gb machine with almost a terabyte of free disk space so I was surprised by the error. The issue comes from how memory is allocated if the VM state is saved and how I installed Hyper-V on a bootable 8Gb USB drive. I found the clue to the answer in Robert Larson’s article on Hyper-V File Storage and Permissions
In my setup Hyper-V itself is running on the USB drive. The USB drive simply contains a .vhd file that holds the bootable Hyper-V image. The image itself takes up about 6.5Gb which leaves 1.5Gb free.
When a VM is initialized it writes a .bin file the size of the amount of RAM allocated to the VM. The default path to that is on the Hyper-V host drive, in my case the USB drive. I had already pointed the Virtual Hard Disk and Snapshot paths to the 1Tb SATA drive because I knew they wouldn’t fit on the USB drive (duh), but I didn’t realize that the location of the VM configuration would need space for all the VM memory dumps.
Change the Virtual Machine path to use the 1Tb SATA drive also.