On the size of the C drive partition: the problem there is that your desktop and the contents of Documents and Settings are automatically stored on the same drive as your OS. You might want to move your My Documents (which is easy), and you can re-define the locations of your Desktop, Temp directory, and Documents and Settings Branch in the registry, although this can get messy as it seems some programs use the registry while others will persist in using the C drive.

On the use of NTFS: Last time I checked Linux based recovery CD's have a hard time dealing with NTFS drives, so be prepared to not have that option.