I think the $6.99 disc is some sort of emergency disc. I doubt it is a true recovery disc.
A couple of things: your Lenovo disc is XP PRO SP3 is the sticker on the bottom of the Thinkpad also XP PRO?
Let us know how big the HD is and what partitions are there. I'm thinking if the HD is large enough you could do some repartitioning and see if you can squeeze out 10gb for a new partition. Then you could try the XP install on that empty partition and if you have problems with the key you can still get back to the situation you are in now.
Go to Control Panel and then Administrative Tools then Computer Management and then Disk Management from the left hand side. That will give you a look at your HD partitions. In the Graph section you should see Disk 0 and then your partitions in the graph. How large is Disk 0 in GB and then how large are the partitions?
You can just go to Disk Management and then hit PrntScrn key and then open Paint and paste the picture into the program and save it as a JPG and upload it. If that is easier.
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Also you can use this program to get your key from your current installation. http://www.majorgeeks.com/Magical_Jelly_Bean_Keyfinder_d2612.html
I'm not certain that that key will actually work but it is definitely worth getting it to have on hand to try. It won't match the key on the sticker which is what is confusing. But I can't remember exactly why that occurs and am not sure if it can be used during installation or if it was simply generated during the original installation by using the generic sticker code. But I'd get the key anyway.