I assume you've checked all the usual things...system restore enabled, slider set to 12%, plenty of room on your hard drive, all drives being monitored, etc.
Two things I found out that help if system restore stops working.
1. In system restore, disable the restore function and reboot your computer. This completely removes any past restore points that may be corrupt. After rebooting, re-enable system restore and try setting a restore point manually. That should work in most cases.
2. Do you have a Highpoint Raid Controller? Driver versions 2.3 and 2.31 stop the System Restore feature from working under WindowsXP - to resolve this you must delete the file hptpro.sys from the c:\windows\system32\drivers\ directory. Once that is done, system restore should work normally.