System Restore is a wonderful tool that was introduced with XP...when it works.  If your System Restore is not working properly, try reinstalling it.  
Here's how...

First Click Start, then My Computer.   Click on Tools then Folder Options.  

On the View tab check mark Show Hidden Files and Folders , and uncheck Hide Extensions For Known File Types then Click Apply

Now, click Start then My Computer then navigate to the C:\Windows\inf   Folder.  In that folder locate the file, sr.inf, right click on it and select Install

A window will pop up asking you to insert your Windows XP Installation CD and locate the sr.sys file. When this window pops up insert your Windows XP Installation CD and then Click Browse

Select your CD Drive from the Drop Down Window, In this example the CD Drive is Drive H:

Once you have selected your CD ROM Drive (With the Windows Installation CD in the drive), open the I386 folder and select the SR.SY_  file, then click Open

Windows will then reinstall System Restore, then when it's finished it will ask you to reboot.  Simply Reboot.  You have now successfully reinstalled System Restore.