Is it dual booting correctly?
If the driver
utility can't be made to change directories, does it then refuse to extract due to space limitations on C?
Others may have another idea but I would try to extend C by just enough space to hold them.
Save a Windows 7 backup image externally if you need to shrink Windows 7 partition from the left as 3rd party resizing operations can fail. It will include C and XP in the image so you wont' have to reinstall either.
I would use free Partition Wizard bootable CD
which has never failed for me. Boot CD, select 1 for screen res, rightclick Windows 7 (or partition right of C which I'm assuming here is first partition), select Resize, slide left border by grey area to right to make enough room in C, OK.
Now right click C>Resize>slide right border to take up newly made space, OK. Apply all steps.
Make a Windows 7 Repair CD first in backup center as resizing System partition can sometimes cause loss of boot. If so, boot Repair CD, click through to Recovery Tools list to run Startup Repair up to 3 separate times with reboots to repair MBR until Windows 7 restarts.