I have my audio software installed on my system drive. But all the project files, aduio files etc have their own separate drive.
There are a few reasons to do it really. Firstly if you have a drive dedicated to streaming audio, and isn't having to do much else, then it's going to be a bit more efficient. Secondly, if your XP system gets screwed, or XP screws your system and the hard drive it's on, your project and audio files are safe on their own hard drive. Meaning you can just reinstall windows on your system drive again and be back up and running.
I don't put my audio software on a separate drive because I don't really feel a need to. My audio pc is used soley for audio, and is never connected to the internet. It is as the day it was when I installed everything. If it all goes down for some reason, I'm going to have to reinstall the software anyway, so I'm not bothered if my install of Cubase gets screwed, all my projects are safe.