Yes, your C & D are both logical drives and they both exist in the same physical drive.
Essentially you need to have minimum of 200MB threshold in your operating system drive in order for windows to function properly.
The most obvious way to free up your C:\ drive and increase the capacity is to remove unnecessary programs from your PC using the Add/Remove programs option, or reduces the number of Restore Points from your system or run the Disk Clean Up option.
I have a similar problem when I took over the computer at my work place and I was left with 100MB in my logical C:\ drive and 40Gb in my logical D:\ drive. After cleaning up the pc, I was left with 300MB. In the end, I decided to use partition magic and resize C:\ over the D:\, since they both exist on the same physical drive.
It's been two years and I have no problem since.
Hope this may help