mjf, this knol seems to have solved this issue ... now I can at least create the System Image. Although I didn't follow it (the knol) all the way through: (1) only deleted the journal files (which brought System Reserved partition back to ~70 MB free space), (2) then did [i]not[\i] reboot, (3) and then immediately went to "Create a system image" tool.
The first time around, I also did check disk (chkdsk) and reboot which (somehow) brought the System Reserved back to (only) 30 MB free.
Thank you, the thread is finally (partially) solved! Deserved a +rep.