One small point, it is best to start a new thread for each problem rather
than tagging on to another's such as Barry's however ...

Do you get the same error when you attempt to create a system restore
checkpoint?  If so ...

First check that you don't have a wininit.ini file in your Windows folder.
If you do, rename this to wininit.old and retry System Restore. If this
works then you possibly have a program that creates a wininit.ini file
each time you boot your system.  One known example is tgcmd.exe, another
is a program called "ACCESS DENIED".  If you have tgcmd.exe I understand
that disabling it in MSConfig | Startup will have no adverse effect on
your system but enable you to use System  Restore.  Likewise ACCESS DENIED
needs to be "switched off" whilst using SR to either create or restore to
a previous checkpoint. McAfee's Spam Killer also seems to create a new
wininit.ini file each time the system is booted.  See also MS KB 274092 -
"Error Message: System Restore Cannot Run Until You Restart the Computer"
(http://support.microsoft.com/?kbid=274092).

If this isn't the reason for your problem then try running
SCANREG   /FIX
from a command prompt such as Start | Run.   Note that the system will
re-boot so don't have any applications open when doing this.  I suggest
this because the same message is also displayed when the registry has been
corrupted in some way. scanreg /fix attempts to repair that damage.

Hopefully one or the other will solve your problem and allow you to create
a manual check point.  If so then please continue with the rest of the
test.

If however you find that you keep getting a wininit.ini file created each
time you boot your system another known cause is due to having unwanted
malware but hopefully we won't have to go down that path.

Since you are attempting to restore rather than create a checkpoint it is
possible that the error you are seeing is the result of not having
installed the 290700 hotfix for system restore although that normally
generates a slightly different error message.

A failure to restore to a previously created checkpoint is often a sign
that the 290700 patch  for system restore wasn't installed when the
checkpoint to which you were trying to return was created.  If that is the
case the checkpoint is useless.

What is the version of the file smgr.dll in the windows\system folder?
You can check this by locating this file in Windows Explorer, selecting,
right clicking and choosing Properties and then clicking the Version tab.
If not 4.90.0.3003 then that could be the cause of the problem and you
need to download and install the 290700 patch for system restore.  The
easiest way to do this is from the link in the associated KB article
(KB290700 - "Checkpoints that you create after September 8, 2001 do not
restore your computer" (http://support.microsoft.com?kbid=290700).

It is also possible that at one stage you did install this patch but have
subsequently reinstalled Win Me over itself using the Win Me CD.  Doing
this causes the original, broken, version of smgr.dll to be reinstalled.
If this problem is a result of your having reinstalled Win Me over itself
may I recommend you to download and use the Belarc Advisor
(http://www.belarc.com/free_download.html) which will help you in
identify which other patches also need to be reinstalled.