You can set the security settings for any drive you want as long as the drive has been formatted as NTFS. Just go to Explorer and right-click the C drive and select the Security tab. There you can change whatever you want. Make sure you change the permissions for just the user(s) you want though.
If you do not see the Security tab, you'll need to disable "simple file sharing" (Tools->Folder Options->View->uncheck the option).
You might want to be careful because if you set the premissions too tight, the user won't be able to run some many programs if they are installed on the C drive.
As an alternative, you can enable quota management so they can only use X amount of space. Just select the quota tab instead of the Security tab.
There are some interesting points here concerning both what has become know as drive “C” and “boot partitions”. Everyone thinks that drive “C” is synonymous with the default boot drive but under XP or NT this is not the case at all as drive “C” can actually be many partitions or even drives or multiple drives and partitions all mapped together. If you are using XP Home edition then it’s not possible to secure your XP system, you must upgrade to XP professional as your administrator account can be over-ridden by the administrator account in XP “Safe Mode” by changing the owner status, re-booting, then re-assigning your own ownership to whatever directories and child directories you previously selected.
I’ve worked on systems that will only boot from a CD which is removed by the system administrator after each session, so even if you can access the BIOS and change the boot order you get the message “no boot record found, please insert the boot disk into drive “whatever” or something similar. If you use XP home addition this is the only secure way to operate using dual boot (third party) software