System Disk Failure
Update 12/31/2012:
I got some errors reported on drive C: from the HP hardware diagnostics. Just in case this is a real problem, I decided to make a new disk image. The backup failed with this message:
The operation failed due to a device error encountered with either the source or the destination. If the source or destination volume is on a disk, run CHKDSK /R on teh source or destination volume, and then retry the operation. (0x8078012D) Additional Information: The request could not be performed because of an I/O device error. (0x8007045D)
A web search for the I/O device error code yielded an suggestion by a microsoft person to turn off "shadow copies" on the drives. The forum is here. A search for 0x8078012D brings me to this forum, which also has some interesting suggestions.
Now running CHKDSK /R on drive U: Drive U: checks out fine.
Now checking out drive C: which needs to be done during boot...bad news on this. The drive is in worse shape than I assumed. CHKDSK fails in progress with a blue screen crash. The blue screen just flashes up for less than a second, but I managed to take a picture of it. The error is BAD_SYSTEM_CONFIG_INFO