Ok, an odd problem.
For one user on a Windows 7 x64 system, attempting to download a file with Internet Explorer 8 results in a error "C:\ location not accessible. Access is denied." even though the target location is not on the C:\ drive. No other users have the problem and no other browsers do.
The user does not remember deleting any folders recently, and it looks like no new software has been installed. A checkdisk comes up clean.
I grabbed some information via Process Monitor that may help with seeing the problem: