My sister inlaw had the same problem with her sony, it reported low disk space, it also reported an incorrect disk size of 450 MB when it was actually a 30GB. We pulled the drive and tested it and it was bad. It was a hitachi drive which seem to be prone to early failure, saw the exact same type of drive failure in a cheap Acer craptop . Get a new drive and use your restoration disk that should have come with the laptop if it was a win7 machine. Good luck.
The backup image of the OS is probably on the hard drive as a hidden partition so if the drive dies, the backup partition goes with it.
However, even if you just have a bare drive, you don’t have to pay for another copy of Windows provided you have your key (which should be on a sticker on the unit somewhere).
Incredibly involved instructions for getting the OS back here:
http://www.sevenforums.com/tutorials/219487-clean-reinstall-factory-oem-windows-7-a.html