Joe,
Free space exclusion failures could be caused by file system problems. Since only one of your volumes is failing, it could be that the C volume's file system is corrupt or has a problem. Run 'chkdsk /r' on the C: drive and watch to see if it finds and/or fixes any errors, and also look in the System event log for errors or warnings originating from ntfs, disk, ftdisk, dmio. If chkdsk finds and fixes errors, try the backup again.
Kevin