Can I put Windows update uninstall folders on a different drive?

Copy them to your backup location, if you need to delete an update, move the appropiate folder back to it's original position

If your file sytem on the C: drive is NTFS, you can add a new drive to the system and mount it as a folder in your C: drive (see this explanation for details). That way the fact that you have two actual (well, in this case virtual) hard drives is hidden from the system, they appear to be only one drive.

This approach is more flexible than smok1's proposal, as compression will not free that much space, and you would run into the same problem again after a couple of hundred more updates. Also, there is no need for manual copying as in Ivo's answer.

It's possible that this feature is limited to XP Professional and does not work in XP Home, but I'm not sure.