Boot Camp Partition Problem

I have a MBP with the 160 gig had option - of the 149 gigs that are usable, about 38 are free and I haven't created any partitions. This computer is coming up on its third birthday. I wanted to install XP on boot camp, so I got a copy of windows, printed the guide and sat down to work. Off the bat I got the following error:

(having image issues - the error says "Back up the volume and format it as a single OS X Extended (Journaled) volume and try again restore your information and try again)

I then tried a few things:
1. In disk utilities I repaired disk permissions/verified disk (no issues)/erased free space and tried again.
2. Again in disk utilities, I tried to create a simple 5 gig second partition on the drive to see if I could do it outside of boot camp assistant.

Trying to create a second partition caused this error to appear:

(having image issues - the error says I can not creat a 2nd partition)

I am not sure what to do next. It seems odd that a drive with 38 gigs can't add a five gig partition. I was thinking of doing one of the two things:
1. Reinstall OS X and restore from boot camp; or,
2. Buy iDefrag and defrag the disk.

Does anyone have any thoughts or alternative solutions?

Thanks.

 

Actually in that last screen shot I was trying to create a second partition just to see if disk utility could do it.... I couldn't and quit half way through. My plan there was to create a partition and erase it having read somewhere that this would force OS X to clean up the drive - meaning once I had created the partition I could delete is and not have the same space issues. I think the archive/install or install from scratch and use time machine may be the way I go.....

 

Funny, archive and install ddin't fix the issue; but, erase and install did.odd.