Let me add some more info to my problem. I have a 120 gig harddrive (system drive), with 95 gigs free actually. I tried the "method 1 workaround" but I can't complete step 2 because there is nothing that says "drive settings." Under the System restore tab under properties, it has my D: drive (40 gig backup drive with 30 gigs free) listed as suspended, but it doesn't even list my C: drive (system drive).
I am running WinXP Pro, without service pack 1, however I am updated with all the other updates from the microsoft website.