The only thing Microsoft has to say about your error message number is detailed Here...
but that only applies to the exchange server 2003. If that's what you have there, then this should ring the bell. Windows 7 is something entirely different.
Have you made any system changes on that thing relating to the page file or amount of disk space that system restore uses to create restore points?
Were there any system services that you may have tweaked? Stopped some, or perhaps changed the "startup type" on some? System restore needs only the volume shadow copy service but by default it is set to manual. You could try setting it to automatic.
Something else that you can check is installed software. There are some programs out there that will interfere with system restore, and for obvious reasons. Software such as Acronis true image for example. That program is one that wants complete control of the volume shadow copy service and related stuff that it needs. If you have something like this installed, it could account for your system error messages relating to system restore.
Do you have the service pack installed? If not, install it...if so, re-install it. No need to uninstall it first, just download a copy and install it directly over itself.
Other than these few suggestions, I'm drawing a blank...and if it were mine, I would consider a repair install.