Just so you know, this is only a problem with Disk Utility on bundled System Discs or retail OS install discs prior to 10.4.6.
Any bundled System Discs or retail OS install discs with 10.4.6 or later should work fine with the drag and drop method.

For those of you with discs prior to 10.4.6, read on:

If you are going to get down and dirty with the Terminal, you might as well just use the ASR command to perform your Restore.

Boot from the System Disc
Select Utilites -> Terminal
Enter:

asr restore --source /Volumes/<source name> --target /Volumes/<target name>

If your volume name has spaces, then do not forget to use a backslash before the space.

Also, if both Volumes are named "Macintosh HD", then it will be hard to know which one is source and which one is target. The system actually accounts for this and names one of them something like "Macintosh HD 1", and you can find this information in the Mount Point field of Disk Utility, but it is much easier to just name your target something simple, like "target". You can always rename it when you are done with the restore.