I am running TUFLOW through SMS on a Windows 7 PC and had the same error message. Even though I am the administrator of the PC, I had to change the SMS properties to run the program as an administrator. (Right-click on the desktop icon, select Properties, select Compatibility tab, and toggle "Run this program as administrator" under the Priviledge Level.)
My IT personnel said that there are some additional levels of security in the Vista/Windows 7 Operating Systems which generate these errors when programs inside another program try to write to the C drive.
Good luck!