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Can you shut off the machine then wait 5 seconds and then power it back on and as soon as you let go of the power button can you press and hold down the ALT + F10 key and after the Acer logo has displayed your machine should boot into the hidden recovery partition so you can then perform a full reinstall.
Try that and let me know if you have any issues
Did it let you into the restore partition?
When you held down the ALT and F10 keys then powered up the machine did it do anything differently or did it boot like normal?
Can you turn the machine off then unplug the power and pull the battery, Next press and hold the power button for 30 seconds then let go and put the battery back in and reconnect the power adapter.
Once that is done can you hold down the ALT and F10 keys then press tho power button and keep the buttons pressed till you either get to the restore partition or you get an error
Let me know what happens
Will it boot into Safe Mode?
Can you try one more thing before we try safe mode, Can you shut it down then wait 5 seconds then power it up and as soon as you let go of the power button can you tap the F9 key and keep tapping till it opens to the restore program or to the safe mode menu
So it will boot into full mode windows?
If so can you click start then programs and let me know if you see an Acer file?
If so can you tell me what it contains?
In that case we are back to trying th F9 option, Can you try one last time to power off the machine then power it back up and this time can you hold down the F9 when you let go of the power button and let me know if the resore menu opens or not..
If not do you have a USB memory stick and a CD for the EEE PC ?
Can you take a look at this eee wiki article http://wiki.eeeuser.com/explain:f9_restore and let me know if you have ever seen the screen like the screenshot.
Well at this point all I can suggest would be to get a recovery drive of some sort, You can get USB recovery drives for your machine that areready setup from ebay http://cgi.ebay.com/Asus-eee-PC-eeePC-701-701SD-XP-CD-recovery-disk-USB_W0QQitemZ110454656320QQcmdZViewItemQQptZLaptops_Nov05?hash=item19b79c4d40
Take a look and let me know what you think
Sorry that I could not help but if we cant get the restore partition to open and the restore application is not installed so we can launch it from Windows then a USB drive like the one I posted would be the easiest way.
The other option would be to get a cd and a usb drive and make your own recoery drive, however it will be cheaper to get a premade as a drive will cost you $20-$30 and the CD will probably cost $20 for shipping and handling.
Let me know if you need more info